Growth stocks are sexy. I get it. Although I used to consider myself a die-hard value investor, I’ve been experimenting with different strategies in recent years and, as it turns out, growth stocks ain’t so bad after all.
Earlier this week I even highlighted three growth stocks to buy on the cheap, focusing on the exciting opportunities afforded by the likes of Ambarella (AMBA), NXP Semiconductors (NXPI) and Facebook (FB).
Still, the latent value investor in me refuses to buy into growth merely for growth’s sake. There still needs to be a hint of value somewhere: an opportunity the wider market is over-discounting, an attractive forward price-to-earnings ratio, a discount relative to peers … all I ask for is one tiny hint of value.
Alas, growth stocks aren’t always accommodating on this front. Three names in particular stick out to me as hideous deals that investors should avoid at all costs: Shutterfly (SFLY), Etsy (ETSY) and Sohu.com (SOHU).
Let’s go through exactly why these stocks are huge threats to your portfolio:
3 Toxic Growth Stocks to Sell Immediately: Shutterfly (SFLY)
Market Cap: $1.7 billion
YTD Return: +9%
Shares of the photo-book company Shutterfly (SFLY) are beating the market this year. I feel unclean just saying that, because by all traditional measures of value, SFLY stock is a complete rip-off.
There are few companies deserving of a forward price-to-earnings ratio of 131 in my eyes, and what I can tell you with even more certainty is that SFLY stock would not be on my short list.
The reasons are simple enough: Although 2014 revenue was three times higher than it was in 2010, sales growth has decelerated in each of those years and is supposed to come in below 15% this year. Plus, Shutterfly is bleeding red ink — it lost 20 cents per share last year, and it’s expected to lose 33 cents this year!
And there’s no tangible sustainable competitive advantage. Tell me Google (GOOG, GOOGL) or Amazon (AMZN) couldn’t grow a Shutterfly-like, cloud-based photo storage and printing website tomorrow. You can’t tell me that. Because you’d be lying.
The last strike against SFLY is its lavish executive compensation, which was opposed by 78% of voting shareholders at the company’s most recent shareholder meeting, and received an “F” rating from proxy advising firm Glass Lewis & Co.
3 Toxic Growth Stocks to Sell Immediately: Etsy (ETSY)
Market Cap: $2.1 billion
YTD Return: -38%
Shares of the handmade goods e-commerce marketplace Etsy (ETSY) are, to put it gently, wildly overvalued. The ETSY IPO priced at $16 per share back in April, doubled in its first day of trading, then plunged in the following months.
InvestorPlace‘s Tom Taulli noted Etsy’s rich valuation after its first day of trading, and the one-side nature of Etsy’s demographic (86% of sellers are women) as leaning toward niche market opportunity. But Etsy just isn’t profitable. Last year, it lost $15 million, and in the first quarter of 2015 alone the company lost $37 million; ETSY stock’s current valuation by market capitalization is $2.1 billion, roughly 11 times its 2014 sales.
Oh, and Amazon, noticing Etsy’s popularity, has entered the same business, recently launching “Handmade at Amazon” to crush Etsy like the cockroach that it is. Amazon is even poaching Etsy sellers from their hippy-dippy platform.
It’s just a matter of time before Wall Street comes to its senses and realizes that ETSY stock is a flash in the pan.
3 Toxic Growth Stocks to Sell Immediately: Sohu.com (SOHU)
Market Cap: $1.7 billion
YTD Return: -16%
Here we have the Chinese media and search company Sohu.com (SOHU) — a veritable piece of filth. Confirming my assertion are cold, hard numbers … what a concept!
Sohu’s net income has been falling since 2011, and last year SOHU crossed over into the red, losing nearly $166 million, or $4.33 per share.
SOHU reported second-quarter results on Monday, and while admittedly both EPS and revenue came in above expectations, the company still lost an adjusted 37 cents per share.
Looking ahead, the company forecast Q3 losses between 55 and 80 cents per share (the lower range being more than double the expectations of a 39-cent loss). Revenue guidance also came in soft, with management calling for between $470 million and $500 million against the consensus $530.2 million.
The SOHU stock price lost as much as 5% Monday on the news. (Of course, it didn’t help that the Shanghai Composite Index plunged 8.5% that day.)
Although, sudden selloffs in Chinese equity markets have given SOHU an aggressive haircut — the stock now trades at a 40% discount to its June highs — this stock still has a ways to fall. After all, it still miraculously commands a forward price-to-earnings ratio of 50.
These excessive valuations aren’t just native to SOHU, I’m afraid.
There are secular problems in the Chinese stock market that simply cannot be solved: Manipulation, the encouragement of margin trading and governmental bans on selling shares are just a few of myriad systemic problems. It’s only a matter of time before it all comes crashing down again.
Eventually, China won’t be able to stop the bleeding, and absurdly valued stocks like SOHU will go up in smoke.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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