Occasionally the market will surprise you, but not in the way you might think.
For the most part market participants behave badly sending stocks higher or lower not for reasons of value, but for reasons of emotion.
On June 28 shares of Blackberry (BBRY), the maker of the Blackberry mobile device plunged after a very disappointing earnings report. Finally a reaction that makes sense.
The company once left for dead had enjoyed a renaissance of sorts thanks to the launch of the Blackberry 10. With much hoopla and not much else the stock had nearly tripled in value in less than a year’s time.
It was a mirage and anyone buying that mirage should have known better.
Blackberry having fallen so far behind the competition had really no chance. Before the recent earnings report optimistic analysts were projecting a small profit for the company in its current fiscal year ending February 28, 2014.
Shares traded for something like 60 times those expected earnings – earnings mind you that were anticipated to become losses in the following fiscal year.
There was nothing about the company that was deserving of such a rich premium.
Sure enough the bottom fell out of the house of cards when earnings were released. Now the expectation on Wall Street is for the company to lose 55 cents per share in the current fiscal year. No wonder the stock fell and fell hard.
It makes one wonder where we can find the next monster earnings disaster like this one. When paired up with irrational exuberance the money making possibilities are huge.
Here are 3 stocks that could be the next Blackberry-like disasters:
On-line radio company Pandora (P) is on fire. Previously skeptical investors are buying the story hook, line and sinker. That story of monetizing an impressive subscriber base with advertising on what was previously an entirely free service appears to be working well.
So what happened to the Apple (AAPL) threat?
Wasn’t the news of Apple entering the business supposed to be a huge game changer for Pandora? You could have fooled me based on what the stock price of Pandora is doing.
Shares have almost tripled in value since last November thanks to a series of profit reports that show the company making progress on its way to profitability.
Just like Blackberry analysts have Pandora making a small profit in the current fiscal year ending January 31, 2014. More importantly the profit growth continues in the following year to earnings of 28 cents per share.
While that may be impressive, it is also very speculative and seemingly already priced into the stock. At current prices Pandora trades for 70 times 2015 estimated earnings.
That is beyond steep. That is outrageous. One misstep and shares could fall hard just like Blackberry.
That day comes as soon as Apple gets serious about its on-line radio plans.
Another stock on the rise of late is giant electronic retailer Best Buy (BBY). A new CEO having successfully rebuffed a buy-out proposal from its founder has the company firing on all cylinders.
The latest news is the launch of an exclusive electronics product – a Bluetooth enabled watch device that allows users to receive texts and messages – available only at Best Buy.
Investors love the hyperbole. To be able to beat Apple to market is a coup to cheer if you are bullish on Best Buy.
Yeah, good luck with that.
At current prices Best Buy now trades well above levels that the founder originally offered for taking the company private. Remember, the founder searched long and hard to secure financing for the deal at those levels.
And he was rejected soundly. I wonder why?
Perhaps it was because some of the greatest financial minds on the planet believed the company to be worth far less. Not only that, these same financiers took a pass when the stock was worth far less and the buy-out price had dropped to the teens.
So how is that in just a few months the stock is worth double the lowest price available to private buyers who ultimately passed on the deal?
The answer is because the stock isn’t worth that price.
The problems for Best Buy are quite large – mainly on-line competition and a lack of new products in the electronics space. Smart phone makers like Apple and Samsung have reached a new phase in the growth of smart phones.
To think those issues won’t impact Best Buy is frankly naïve. As for this new electronics device I would worried by the fact that the company has zero history with exclusive products.
This is not going to end well and a poor earnings report is the likely trigger.
I wish I could run a company into the ground and still be rewarded with a $49 billion market capitalization. That is the current value of Hewlett-Packard (HPQ).
The company tied to the personal computing and printing market has seen its shares double in value since November. New CEO Meg Whitman appears to be pulling all the right strings.
Watching her work reminds me of the carnival barkers for the freak show.
Step right up and buy your shares. We are going places you would not believe.
Of course once you have your ticket and get inside do you see the bearded lady with her painted on facial hair or the gorilla man who is wearing a gorilla suit.
It is not real people and neither is the recovery at Hewlett Packard.
How can it be?
The personal computer is dead and not coming back any time soon. Hewlett Packard was way late to the tablet party dashing any hope of staying on the cutting edge of technology.
Analysts expect the company to make a healthy profit of $3.57 in the current fiscal year ending October 31, 2013, but that number is expected to stay flat in the following year. At current prices the stock trades for 7 times next year’s earnings.
The problem is that earnings are going to fall if anything in the near term. What is on the horizon to change that?
If you want to know how the Hewlett Packard story ends just look at Dell (NASDAQ: DELL). That computer maker is having a heck of a time finding its way into private hands at a price that will satisfy current investors.
What those investors fail to realize that any value now is likely to surpass what is coming down the road.
The same is going to play out for Hewlett Packard.