by Lawrence Meyers | November 1, 2012 8:55 am
No matter what, you can always find stocks that need selling.
Oftentimes, they are companies that are wildly overvalued. If you bought in early, you should be taking profits off the table and setting stop-loss orders. If you came to the party late, it’s important to recognize that the stock you’re holding might have seen its momentum highs and it’s time to get out.
Trust me, I’ve been the sucker many times.
Two of the three stocks I’m mentioning today, however, have broken business models. You need to discard them because (despite what bulls say) these companies do not have a future. The other stock is your average run-of-the-mill momentum play that has seen its highs and will fall further from here, though the company likely will be around for the long haul.
Daily-deals site Groupon (NASDAQ:GRPN) might only be at $4 per share, but if you’re still holding it, don’t wait any longer. Although Groupon has some brand value being a first-mover, the truth is there ultimately is nothing special about this company. Any number of local competitors have, and will continue, to spring up. If Google (NASDAQ:GOOG) wants to get into this business in an even bigger way, it can and will, and blow Groupon away with marketing dollars. The same goes for Amazon (NASDAQ:AMZN).
Plus, the early users of Groupon have learned that they can’t just buy everything, because they will not use certain coupons and take a loss.
This is not a proprietary business, and you want to stay away from those when they don’t have established market dominance.
Netflix (NASDAQ:NFLX) had two pieces of news hit in the past week that drove the stock from $60 (after a bad earnings report) to $80 — first on rumors of a Microsoft (NASDAQ:MSFT) purchase, then on news that Carl Icahn has taken a 10% stake. That’s good news if you want to get out, because both are actually bad developments.
First, there’s no way Microsoft buys Netflix. Why would MSFT buy a company whose only line of business will soon be low-margin content streaming, with $5 billion in content obligations, and competitors with much deeper pockets — like Amazon — breathing down their neck?
Second, Icahn has a very mixed track record. The only other entertainment entity he has dabbled in was Lions Gate Entertainment (NYSE:LGF), and he was totally rebuffed by the board in trying to institute a sale or management changes. He attempted a proxy fight to take over now-defunct Blockbuster in 2005 that could not have worked out, given that Blockbuster, like Netflix, was a one-trick pony that had a nice run but no future.
Chipotle Mexican Grill (NYSE:CMG) is the overvalued player in the group. There’s nothing wrong with the business; it’s doing just fine. However, Chipotle’s growth has slowed significantly.
With restaurant concept stocks, the pattern is always the same. There’s a huge burst of interest, the stock skyrockets as the concept rolls out in a big way, and growth numbers climb to the stratosphere. Then, growth eventually slows from white hot to merely robust, the earnings multiple naturally contracts, and the momentum days are over.
Chipotle is in the latter part of this story line. Despite soaring profits the past two quarters, CMG shares have endured two consecutive post-report beatings as those profits have failed to meet sky-high investor expectations. The stock is now down 25% year-to-date, yet still trades at 30 times trailing earnings and 25 times forward earnings.
We’ve been given fair warning. Now is the time to get out.
As of this writing, Lawrence Meyers owned December 80 Puts on Netflix. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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