There should be a reality television series called “To Catch a Falling Knife” in which some poor investor tries to buy a stock he thinks is being sold off for no good reason — and then we get to watch what happens as his hands start bleeding.
Sometimes stocks sell off for good reasons, and sometimes they don’t. In either event, the stocks most vulnerable to massive selloffs are the momentum plays — high-growth companies that suddenly get a stick in the eye when their story changes. These three companies have sold off big-time from their highs, all because of what I believe are fundamental issues surrounding their core business models.
Green Mountain Coffee Roasters (NASDAQ:GMCR) was ground for a single-day loss of $30 earlier in November. Part of this drop was attributed to a disappointing fourth-quarter report on revenues. The other issue, however, is an SEC investigation surrounding the company’s accounting.
Now, I want to make it clear that this doesn’t mean anything improper is going on at Green Mountain. However, one hedge fund manager, David Einhorn, has made the case that there is, the media has taken hold of his thesis, and the stock has suffered. He’s also pointed to serious cash flow issues at the company. I can only speak to the disappointing revenue numbers and cash flow.
In the FY ending this past September, GMCR had negative free cash flow of $283 million, which expanded from -$128 million in 2010 and -$10 million in 2009. This is a really bad sign in my view. Of even greater concern is that even with Green Mountain stock down 50% from its highs, only three insiders have purchased stock — for a total of about 6,000 shares. That’s nothing, and it doesn’t give me confidence. Einhorn also has a great track record. I would stay far away from Green Mountain at this time.Netflix
Green Mountain might very well survive over the long term, but I don’t think such will be the case with Netflix (NASDAQ:NFLX). I’m so sorry to write this, because I love Netflix! However, my thesis is simple as to why it won’t survive. Streaming eventually will replace DVDs. The DVD model is such that Netflix can buy a DVD and rent it as often as it wants. With streaming, it must pay a license fee to stream the content, and that has proven to be very expensive.
Netflix has a cash problem. Its competitors — current and future — do not. By that I mean Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), all of which have billions of cash and cash flow. I think Netflix is a short, although I’d use a tight stop-loss given its volatility.IMAX
Finally, I have to put the stink eye on another product I love — IMAX (NASDAQ:IMAX). I love seeing movies in real IMAX! IMAX is expanding its screen count rapidly worldwide, which is great for the company and great for revenue. But once all those screens get installed, they’ll be relying primarily on joint-venture revenue with the studios, in which IMAX gets a 10% to 15% cut of the box office and concessions from its screens.
The problem is that the secular trend is for people to move away from watching movies and to enjoying other types of entertainment. Every year this past decade, save 2009, gross volume of ticket sales has dropped. Not every film is an Avatar or Harry Potter, and Hollywood’s content continues to disappoint. Throw in the fact that only limited genres play on IMAX — as in, the most expensive and therefore more infrequent films — and IMAX’s long-term revenues will be limited. It’s not a short right now because there still are years of expansion ahead. But I would not buy in — ever.
Sorry to be a downer, but if you hold these stocks, I’d get out now before your coffee gets cold, your DVD player becomes a paperweight and IMAX starts playing Bridesmaids.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned stocks.