“Trying to catch the bottom on a falling stock is like trying to catch a falling knife.”
That timeless analogy from legendary growth investor Peter Lynch still holds true today. Enticed by the perceived bargain, investors occasionally like to hunt beaten-down stocks in hopes of timing the market perfectly. More often than not, these tempting stocks end up bleeding their believers dry.
However, when the strategy is successful, one savvy play can lift an entire portfolio.
Consider Las Vegas Sands Corp. (NYSE:LVS), the casino operator whose shares peaked above $140 in 2007 only to crumble and fall below $2 per share during the financial crisis as the company’s debt load and a devastated economy combined to paint a bleak forecast.
If you would’ve bought LVS stock for $14 — a 90% discount to its peak — in October 2008, you’d have quadrupled your investment over the next six-plus years.
Back to reality. It’s 2015 after all, and there are freshly battered and bruised stocks to peruse in hopes of finding a bargain. We take a look at five stocks to see if they’re doomed dogs or bargain buys.
Doomed Dog or Bargain Buy? Lumber Liquidators Holdings Inc (NYSE:LL)
1-year performance: -62%
Boy, oh boy, is Lumber Liquidators Holdings Inc (NYSE:LL) facing an uphill battle. Shares of the hardwood flooring retailer took two distinct 20%-plus stumbles in as many weeks after an earnings miss and bad — really bad — press put LL stock in a tailspin.
60 Minutes, the long-running weekly news program airing on CBS Corporation (NYSE:CBS) and known for its investigative reporting and in-depth pieces did a damning piece on Lumber Liquidators on Sunday, March 1.
To be clear, Lumber Liquidators warned investors that a not-too-flattering 60 Minutes report was coming last week. CEO Rob Lynch cautioned last Wednesday that the program would “feature our company in an unfavorable light with regard to our sourcing and product quality, specifically relating to laminates.”
He was right.
The 60 Minutes report claimed that it tested 31 samples of LL’s laminate flooring sourced from China and sold in five different U.S. states, with only one coming back as compliant with California formaldehyde emissions standards. Some pieces were more than 13 times the state limit.
Although Lumber Liquidators disputes the testing methodology 60 Minutes used, expect LL stock to face strong pressure as investors debate the merits of the investigation. If there’s even a hint of truth to the claims, this stock’s a goner. Add to that the fact that the U.S. Department of Justice might be going after the company for violating import laws, and LL stock isn’t just a doomed dog, it’s a doomed dog with fleas.
Verdict: Doomed Dog
Doomed Dog or Bargain Buy? Noodles & Co (NASDAQ:NDLS)
1-year performance: -50%
Fast-casual restaurants are a recent sort of cultural phenomenon, and with the blowout success of Chipotle Mexican Grill (NASDAQ:CMG) written in stone, the industry is now firmly on Wall Street’s radar. To its credit, Noodles & Co (NASDAQ:NDLS) took full advantage of the fast-casual frenzy when it went public in June 2013.
Since then, however, the NDLS stock price has plunged, as the inflated IPO price was rooted out by market forces. Expectations were too lofty, and top-line growth has been slowing for the past two years. After fourth-quarter 2014 results missed expectations and 2015 guidance also disappointed, NDLS again took a beating in late February, falling 30% in a single day.
That selloff was far too steep, and NDLS stock now finds itself trading at just 1.4 times sales, a fraction of the 5 times sales CMG stock fetches on Wall Street.
It’s true that NDLS could study up on efficiency — its operating margins are about one-third of Chipotle’s — but that’s exactly why I see opportunity for Noodles & Co, which has plenty of room to deliver more cash to investors while still delivering awesomeness to consumers’ bellies.
Verdict: Bargain Buy
Doomed Dog or Bargain Buy? GoPro Inc (NASDAQ:GPRO)
YTD performance: -36%
Sit down, kiddies, let me tell you a story.
Once upon a time, GoPro Inc (NASDAQ:GPRO) was the hottest thing on Wall Street. GPRO stock, you see, more than doubled in its first week of trading. It only took a few more months for the $24 stock to quadruple and approach $100 per share.
Alas, our story takes a disappointing turn from there. From early October on, it was all downhill. Shares of the wearable action camera maker were frothy, and it only took little negativity to bring out the sellers in droves.
First, CEO Nick Woodman figured out a way to skirt the lockup period and sell GPRO stock before the rest of GoPro insiders. Then, a report that legendary Formula One racecar driver Michael Schumacher suffered a serious head injury because of a GoPro strapped to his helmet aggravated the selloff. The allegations were recanted, but it was too late for GPRO stock. After a lowballed secondary stock offering in November and weak first-quarter earnings guidance, the GPRO stock price rests at a fraction of its peak.
While it’s true that GoPro doesn’t really have any peers, how much growth is left in the wearable camera market? There may be some room, but we’re reaching saturation. After growing sales at 124% in 2012, 87% in 2013, and 41% in 2014, revenue growth is expected to slow to 24% in 2015.
Trading at a forward P/E multiple of 30, the GPRO stock price still has room to fall at these levels. I just hope someone gets the tumble on tape.
Verdict: Doomed Dog
Doomed Dog or Bargain Buy? 3D Systems Corporation (NYSE:DDD)
1-year performance: -60%
Not too long ago, 3D-printing was being hailed as the next big thing. Are you an architect with a zany but impractical idea for a building? No problem! Just custom print it from the ground up! And hey, have a drink when you’re done because these things print livers, too!
While that’s all very Jetsons-esque, the reality is that 3D printers are better suited to print Legos than livers. As fed-up investors waited and waited for the explosive “additive” revolution that was to come, it never came. As valuations of the whole 3D printing industry spiraled lower, so too did the 3D Systems Corporation (NYSE:DDD) stock price.
DDD stock trades at about 30 times projected 2015 earnings, but that in itself isn’t too egregious for a company expected to grow sales and EPS by 32% and 37% respectively this year. After DDD whiffed on both revenue and EPS expectations last week, InvestorPlace Contributor James Brumley noted that the entry of Hewlett-Packard Company (NYSE:HPQ) into the industry would also pressure profit margins for all participants in the years ahead.
DDD may help you print things, but money isn’t one of them.
Verdict: Doomed Dog
Doomed Dog or Bargain Buy? Pandora Media Inc (NYSE:P)
1-year performance: -60%
Pandora Media Inc (NYSE:P) has a problem. Several, actually. Pandora isn’t profitable, its margins are at serious risk of being pressured further, and a spate of competitors have entered the streaming music arena to challenge it.
“Consider Apple Inc. (NASDAQ:AAPL), for instance, with its iTunes Radio and $3 billion acquisition of Beats. AAPL is aggressively muscling in and has a tidy sum of $178 billion to throw at its problems. Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has Google Music, Microsoft Corporation (NASDAQ:MSFT) is running Xbox Music, and Amazon.com, Inc. (NASDAQ:AMZN) is no Silicon Valley bum, either.”
Those are some major names, and we haven’t even considered Pandora’s most direct competitors like Spotify and iHeartMedia Inc (OTCMKTS:IHRT) yet.
On top of a cutthroat industry, Pandora is essentially getting subsidized by the federal government right now, something that will end with 2015. When its licensing rates get reset at the end of the year, they’re likely to be far less favorable, especially with music industry lobbyists getting more and more vocal about the unjustly low fees Pandora pays musicians.
Pandora stock is long past its crescendo — it’s time to take a bow, take your money, and run.
Verdict: Doomed Dog
John Divine is an Assistant Editor at InvestorPlace. As of this writing, he was long AAPL, GOOG and GOOGL.