I joined Varney & Co. for today’s halftime report along with Larry Levin from Trading Advantage, and Liz McDonald and Nicole Petallides from Fox Business.
First item on the agenda: General Motors (GM). I found myself in the minority arguing that GM is undervalued and that fears over its costly ignition switch recall — which has already resulted in GM taking a $300 million charge to earnings — are overblown. Rival Toyota (TM) suffered through a much more severe recall in 2009-10 without lasting effect, and General Motors has the added benefit of recently emerging from government ownership with a relatively clean balance sheet.
Could General Motors have more downside ahead? Sure. But GM stock trades for a modest 7 times forward earnings and yields 3.3%. At those prices, a lot of bad news is already priced in.
My take? Amazon’s announcement is non-news. Amazon’s video streaming services are already available on every smart device, and the company is entering a low-margin business — hardware — that already has stiff competition. Knowing Amazon, they will probably sell the device at close to cost. But given that entry-level Roku devices sell for less than $50 and the Chromecast sells for just $35, it’s hard to see a lot of disruption from competing on price.
And as for Amazon, my view has been consistent for months: Amazon is a great company but a terrible stock at its current valuation — 639 times trailing earnings and 2.3 times sales. This compares to 15 times earnings and 0.51 times sales for Walmart (WMT). Amazon is a fine, growing company, but investors are paying too much for that growth.
Moving on, Stuart Varney commented that video game retailer GameStop (GME) might soon be on death watch after it was dealt potentially devastating news: Walmart is making a major push into used video games.
The panel was in agreement here. All four of us are bearish on GME. I argued that it could be a “cigar butt” with a few puffs left in it, but I’m not a buyer.
Returning to WMT, the company proved again how it became the world’s largest retailer. Gamers will be able to trade in their used games for store credit that can be used to buy groceries and basic necessities. At a time when Walmart’s core working-class and middle-class customers are struggling with high unemployment and stagnant wages, the company is essentially allowing its customers to barter and conserve cash.
Will this have a huge impact on Walmart’s revenues? No. But it shows that, despite its gargantuan size, Walmart has not lost its ability to innovate.
Again, I find myself in the minority. Netflix, as the faster-growing company, was the clear favorite of the panel. But as I argue, at 226 times earnings, there are high expectations built into NFLX’s share price. Yahoo, on the other hand, has virtually no expectations built into its share price. Backing out the value of Yahoo’s 24% stake in Chinese e-commerce company Alibaba.com (Yahoo’s ownership interest is estimated to be worth about $35 billion) and the value of its cash on the balance sheet, the market is implying that Yahoo’s other businesses are worth nothing. Investors quite literally have nothing to lose in investing in Yahoo at current prices.
In the second bracket we had IBM (IBM) vs. 3D Systems (DDD). I found myself in the majority this time. I argued that IBM was the safer choice, and that 10 years from now I could be certain that IBM would still be in business and still paying a solid dividend.
3D Systems? Not so much. Investors are paying a large premium for a company in low-margin hardware facing patent expirations and cheap competition from Asia. And for all of the hype surrounding 3D printing, it has yet to really penetrate the consumer market. It’s a sexy story, but it’s a stock that is priced to disappoint.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long WMT. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.