The 10 Most Controversial Stocks of 2012: Where Are They Now?
Our update on RIM, Zynga, Green Mountain Coffee Roasters, and the other names we deemed risky heading into the calendar year.
MINYANVILLE ORIGINAL The market can be kind to those who don’t deserve it, cruel to those who do, and unfair about how money is spread around, so nothing is ever written in stone. Last December, we made our predictions about which stocks would be the riskiest places for your money. Now we're ready to update you on how those stocks are doing. Did we foresee doom in companies that didn’t deserve it, or were we right to write them off before they took bigger losses? Read on to find out:
What We Said Then: Gone are the days of BlackBerry-or-bust, when every enterprise in town equipped employees with the addictive black smartphone. Lately, Research In Motion’s stock price has hovered around a six-year low. In its latest earnings report, RIM said it expected revenue of between $4.6 billion and $4.9 billion, lower than analysts' already low expectation of $5 billion. The company also announced it planned to ship between 11 million and 12 million BlackBerry units, where analysts were hoping for 13 million. Citi analysts reacted to the report with a "sell" recommendation, and predicted that RIM would miss targets for both holiday sales and back-to-school 2012, according to the Wall Street Journal.
Does management even know what’s happening? Not so much, according to a letter written by a “high-ranking employee” bemoaning that management is “disconnected with the realities of the mobile industry” and “out of touch with how low the morale of its employees has dipped,” according to CNET.
Instead of launching new smartphones during the first six months of 2011, RIM concentrated on its PlayBook tablet, which failed to the tune of $485 million in losses. RIM isn’t offering a much-needed tablet OS upgrade until February 2012, instead favoring extracurricular activities like helping police hunt down British rioters. Perhaps RIM’s upcoming BBX mobile platform will be a hit, but, given its recent track record, that’s a questionable bet.
What Happened: We got it pretty much right with Research In Motion. The company’s year-to-date stock performance is down 44.10% so far, and there's little to indicate that things will get better. Hard details about RIM’s upcoming BlackBerry 10 were missing from September’s smartphone announcements, which may show the company's lack of faith in its ability to compete with the iPhone 5 (NASDAQ:AAPL) and Google’s (NASDAQ:GOOG) new suite of Androids.
Right now the BlackBerry 10 is rumored to be released sometime in January, well after most of the major smartphone releases, and the best any major outlet has been able to say about it so far is “that it will focus on the keyboard.” Although the company seems to have given up on its tablets, its executives still seem disconnected with the market as they haven’t realized the importance of building a strong app database. In comparison, Microsoft (NASDAQ:MSFT) has been slowly building it app database, and as a result its Windows Phone has been stealing market share from RIM.
What We Said Then: If you see a flat-panel LCD ad in China, chances are the screen is owned by Focus Media Holding, China’s biggest lifestyle-targeted digital media company. But if a recent independent investigation of the advertising giant holds water, FMCN’s ads might as well be saying, “We lied.”
The research firm Muddy Waters issued a critical report in November 2011, accusing Focus Media of a host of fraudulent activities, including overstating the number of LCD screens it owns by 50%, claiming to own and “dispose of companies it never actually purchased,” writing down more than 20 acquisitions to zero and giving them away, and insider trading to the tune of $1.7 billion.
After Muddy Waters released the report, rating the stock a strong sell, Focus Media's stock fell 40%. Focus Media officials wrote an elaborate rebuttal to Muddy Waters’ report, so the question of corruption hasn’t yet been settled. Still, for the time being, Focus Media has put a spotlight on cronyism in China; the fallout remains to be seen.
What Happened: Muddy Waters is still on Focus Media Holding’s case, but the company has been experiencing a string of good luck lately. Its stock is up 21.29% for the year amidst rumors of going private and programs to buy back shares from investors. In August, the company was allegedly offered a $3.49 billion buyout from the Carlyle Group, though a deal has yet to take place. There is still some speculation on whether or not the company has been fudging its numbers, so you may be wise to stay away, but some analysts believe that short-selling might be the way to go right now.
What We Said Then: When MF Global (PINK:MFGLQ) made $6.3 billion in repurchase agreements (repos) with indebted European nations, including Ireland, Italy, Spain, and Portgual, it was, despite the European disaster, supposed to be a low-risk investment. It appears, however, that MF Global’s counterparties reneged or made untenable demands on the agreements, according to the Financial Times. As a result, MF Global, facing a liquidity shortfall, used more than $890 million in segregated customer funds to cover its losses -- and then filed for bankruptcy. Customers, needless to say, were not happy.
That brings us to New York-based investment bank Jefferies & Co., which, like MF Global (a former investment), has exposure to European debt. Amid investor jitters, the company disclosed that its net European exposure was only about $90 million, and that it does not have any repo-to-maturity activity. After the MF Global fiasco, Jefferies also diminished its sovereign debt holdings in Italy, Ireland, and Portugal by nearly 50%, according to Sumfolio.
Jefferies has since released an earnings report that reassured investors: The firm had cut exposure to European sovereign bonds by $4.3 billion, or 82.5%, since early November, according to Reuters. Although the company paid for the defensive moves, reporting weaker profits and revenues, investors welcomed the decision to reduce risk. The stock price rose nearly 23% in trading the day earnings were announced.
What Happened: So far, the assertions of Jefferies & Co. seem pretty trustworthy. The company is up 2.55% for the year. The European market also seems to be doing better lately, so perhaps the company’s investments in its debt may not suffer the losses that were initially predicted.
However, Jefferies isn’t completely out of hot water. At the end of September, Knight Capital Group (NYSE:KCG) suffered a $440 million loss from what it called a “technology issue,” and Jefferies & Co. was one of six firms to invest equity valued at $400 million to prevent Knight Capital’s possible bankruptcy. Jefferies and The Blackstone Group (NYSE:BX) took control of the most potential shares, meaning that they have the most to gain and also to lose from the deal. Although its investments in Knight Capital might not be as worrisome as its stake in Europe’s debt crisis, cautious investors should be wary of Jefferies' financial choices.
What We Said Then: In the third quarter of this year, Netflix knocked the wind out of its own sales by increasing the price of its combination streaming movie and mail-in DVD service by 60%. As a result, 800,000 users canceled their subscriptions. Netflix then added to consumers’ ire by limiting its streaming media to one device at a time. Netflix stock, which had enjoyed a two-year climb from the beginning of 2010 to a peak of more than $300 per share in July 2011, has nose-dived to around $70 per share.
While this means a saner price-earnings ratio than July’s 80, the mail-in DVD company still faces substantial threats. For one, big-name competitors like Apple and Amazon (NASDAQ:AMZN) have caught up with Netflix’s formerly unique business model and are nipping at market share. There are rumors of Netflix selling its streaming service to the highest bidders, and additional rumors of a Securities and Exchange Commission investigation. Where is this all going to end up? At present, it seems as though even management doesn’t know.
What Happened: Netflix has had an up-and-down year so far. While Netflix performed well in the early months of 2012, its stock price fell sharply in the summer months when analysts said the company was struggling to compete with its many rivals. Its high level of international spending was another factor weighing the stock down.
This month is marking a sharp turnaround for the company, as reports of increasing customer satisfaction are inspiring more faith in its future performance. In light of the positive consumer feedback, analysts are beginning to wonder if thoughts of Apple and Amazon’s threat of competition were overblown.
Last week, analysts from Citigroup and notable hedge fund manager Whitney Tilson reiterated the company’s buy rating, which is raising investor confidence. Netflix’s year-to-date performance is up around 5%, but there are still some concerns about whether its international investments will be worth it. Netflix bulls might be laughing now, but they are still far away from converting its bears.
What We Said Then: Greenhorn Capital hedge fund manager David Einhorn, whose fund enjoys a 25% average return, is best known as the guy who shorted and publicly denounced Lehman Brothers in 2007. Will Einhorn’s latest target, Green Mountain Coffee Roasters, end up as a horticultural Lehman?
In a presentation, Einhorn made the case that Green Mountain not only has an unsustainable business model, but that something smells like a rat in Keurig-land. In Einhorn’s analysis, the company’s lack of transparency and disclosure, “peculiar relationships with quasi-captive distributors” that led to inflated sales numbers, and heavy insider sell-offs smack of funny accounting. Green Mountain CEO Larry Blanford denies it all.
Whether Green Mountain Coffee Roasters is a good bet remains a heavily disputed topic. At one point, Green Mountain had beaten analyst quarterly estimates by 10% to 36% over the year, as the Motley Fool’s Rick Aristotle Munarriz noted.
Einhorn himself remains short Green Mountain Coffee Roasters, for reasons that won’t play out until next year. Although his investors already celebrated one victory this fall when, as Minyanville's Michael Comeau reported, Einhorn's "very ugly and very public campaign against Green Mountain Coffee Roasters culminated in a massive gain for his investors as the former momentum favorite crashed and burned." In the November report, earnings came in at $0.47 per share, beating consensus estimates by a penny, and revenues rose 91% to $712 million, missing Wall Street's expectations by about 6%.
Only time can tell what will happen to this once caffeinated stock.
What Happened: Well, time has spoken; 10 months into this year, Green Mountain Coffee Roasters is much worse off. To date, the company has suffered a 49.52% decrease in stock price, and has been falling regularly. Einhorn is still on the company’s back as well, most recently speaking against them at the 8th Annual Value Investing Congress.
In his speech Einhorn noted Starbuck’s (NASDAQ:SBUX) initiative to enter into Green Mountain Coffee’s key business segment with its new product-- the Verismo -- an espresso maker that can double as a coffee machine. He also criticized Green Mountain’s aggressiveness on CapEX spending, despite its plans to reduce it in the future. While normal capital spending is 3.3% of sales, Green Mountain's spending is over 9%.
Other troubles for Green Mountain Coffee Roasters include the recent loss of its patents, and the loss of key partnerships through licensing agreements. Einhorn believes that these contracts will be renegotiated with less favorable terms for Green Mountain. In addition, he believes that Kraft (NASDAQ:KRFT) will soon enter the market via its Maxwell House brand, adding even more pressure to a company that has to deal with Dunkin' Donuts (NASDAQ:DNKN), Peet’s Coffee & Tea (NASDAQ:PEET), and Tim Hortons (NYSE:THI).
What We said Then: If Salesforce.com’s P/E ratio of more than 400 doesn’t make you blink, the fact that account receivables are growing at 300% of revenues should. Those seven insider sell-offs during the past two months might also give you pause.
The enterprise cloud computing application provider has one of the most overvalued stocks on the market, and executives seem to know it. Company execs have been taking less compensation in stock and more in cash of late. The question seems to be not if Salesforce.com’s stock will drop, but when it will happen, and how the company will handle it.
What Happened: If the bears were waiting for a drop, they certainly had to wait for a while, and they didn’t get much. Saleforce.com’s stock did dip in the summer months, but quickly bounced back to its previous high. At the moment, the company is enjoying a 51.13% increase in stock price from the previous year. The Street.com's Research Center has labelled this stock a hold after releasing a report that highlights robust revenue growth, an increase in stock price, and good cash flow. On the downside, the company’s net income and return on equity have decreased over the past quarter, and various companies are starting to encroach on its territory. Still, Salesforce.com seems stable for now.
What We Said Then: Thanks to China’s entry into the solar panel manufacturing industry, the volume of solar panels produced has increased threefold during the past three years. Panel prices, meanwhile, have decreased 43% this year, according to a Bloomberg BusinessWeek report. As a result, First Solar, the nation’s largest solar company, had to change its strategy, shutting down research into Solyndra-like material in favor of developing a utility-scale project niche, the report writes.
And there’s more trouble on the horizon. First Solar has an oversupply of photovoltaic products, which it must now sell for less, and CEO Rob Gillette stepped down in late October without stating a reason. Zacks has given the stock, currently at a four-year low, an underperform rating. All this for a company Forbes ranked as one of America’s fastest-growing technology companies at the beginning of 2011.
What Happened: IBISWorld recently stated the solar panel manufacturing industry will be among the fast growing in the next five years, but you wouldn’t know it from looking at First Solar. The company has lost 39.87% off its stock price to date. On October 5, the company’s stock plunged by 10.5% after being downgraded by Mark Bachman at Avian Securities. Bachman’s main reason for losing faith in First Solar comes from its low product reliability. First Solar has been having to replace modules made between June 2008 and June 2009 because of potentially loose core plates.To add insult to injury, First Solar has also been reporting manufacturing issues since February, adding more weight to Bachman’s assessment.
What We Said Then: Although the daily-deals trailblazer has an enviable 115 million or more subscribers, with a 2011 loss of $633 million, each of those subscribers costs Groupon roughly $5.50. Where has all the cash gone? To marketing, according to Seeking Alpha’s Colin Lokey: Groupon has siphoned $466 million in an effort to draw in more subscribers. Yet only about 25% of those precious subscribers have bought coupons from the site, Lokey writes.
Moreover, businesses are starting to realize that Groupon isn’t all that and a bag of chips, for various reasons, not the least of which is that Groupon takes around half the revenue from a deal. Groupon’s local deals revenue fell by 3% last quarter. So far, the company has been propping up its stock value through insanely low float -- only 4.7% of its shares are being sold to the public -- but with online giants like Google and eBay (NASDAQ:EBAY) now in the daily deals fray, Groupon’s long-term value is up for grabs. (See Groupon is Effectively Insolvent.)
What Happened: Groupon has been faring better since September. But over the past year, the company hasn’t been doing well at all. Its stock has dropped a ridiculous 73.39% since the beginning of the year. In February 2012, the company confirmed investors' worst fears by reporting a fourth quarter 2011 loss of $9.8 million. Groupon’s value was further driven downward because of the quick retirement of several of the company’s C-level and executive staff. On September 3, the stock hit an all-time low of $4.15 per share before starting a slow climb upwards.
Despite still being behind for the year, Groupon’s stock is up 28.57% over the past month. The stock is still very much considered volatile, but the failure of many of its competitors is driving it to some success. Still, as the social media bubble seems likely to burst, analysts seem to feel that this is not a stock to buy hastily.
What We Said Then: Although FarmVille developer Zynga raised $1 billion in its recent IPO, the largest amount since Google went public, its much-anticipated first days of trading were less than overwhelming. That must be a real sore point, considering the company “did anything possible just so that we could grow and be a real business,” as CEO Mark Pincus said in a Startup@Berkeley speech.
By “a real business,” Pincus presumably means treating employees poorly enough to face an exodus of talent, being steadily embroiled in accusations and cross-accusations of copying games, and recovering from an advertising-based revenue model that included scams. Perhaps the most important question, however, is whether Zynga is sustainable as a business. A creator of simple games that piggyback on Facebook (NASDAQ:FB) depends on two things. One, that users won’t get bored with those simple games (or that Zynga can branch out, as it is currently trying to do), and two, that Facebook itself doesn’t bomb.
What Happened: We were 100% right on this one, as everything that could have gone wrong for Zynga pretty much did. Although the recession and the decline of the full retail game industry have made it easier for small time game developers to turn a profit, Zynga’s horrible luck has kept it from reaping the benefits.
An increase in competition and poor usage of its products has kept the company from hitting profit marks and gaining good will from investors. To date, its stock price is down 74.81% to a measly $2.42 per share. Under these circumstances, Marcus Pincus has had to send out a string of PR announcements to not only assure investors, but also employees who are looking to jump ship. His efforts seem for naught, though; the company has been hemorrhaging talent as C-level officers and executives resign on a regular basis.
In truth, Zynga’s situation has been formed not only by its own failures, but also those of Facebook, whose IPO and aftermath became increasingly hard to watch. Naturally, as Facebook’s profit potential was called into question, so was Zynga’s, and the social game developer suffered its worst hits to stock value in that time.
Then, when things seemed like they couldn’t get any worse, video game giant Electronic Arts (NASDAQ:EA) decided to kick the company while it was down, and slap it with a lawsuit claiming that Zynga’s game The Ville was a ripoff of Electronic Arts' The Sims Social game. Zynga recently filed a countersuit accusing Electronic Arts of being anti-competitive, but its odds of success are low.
Perhaps more damning is the fact that a large portion of the video game community -- who are usually anti-Electronic Arts -- has already sided against Zynga in the feud, meaning that all sides of the market are against the developer. Forgive the pun, but any way you play it, it's game over for Zynga.
What We Said Then: While Nokia is still the world’s largest cellphone manufacturer by volume, the almighty revenue crown belongs to Samsung (PINK:SSNLF) now, and Nokia shows few signs of catching up. Nokia sales have fallen 13% year-on-year. The company posted two successive losses in 2011, and continues to lay off employees, including 3,500 global workers this past September. There are rumors of a Microsoft takeover: For higher-end devices, Nokia has forsaken its Symbian operating system in favor of the Windows phone, for which it pays royalties. And in emerging markets, which Nokia depends on for profits, low-cost competitors are eating into market share and margins. Ratings agency Fitch downgraded Nokia to a BBB- credit rating, one tier above junk bond status.
Nokia hopes to make up for its losses with new products, including the well-thought-of new Lumia smartphone series. And in the third quarter of this year, Nokia showed signs of recovery in the low-end feature phones market. Is the cellphone maker a falling star or will it nest in a new niche? Only time will tell.
What Happened: Nokia’s recovery proved to be short lived. By May of this year, the company’s stock began to slide to a point it may not recover from. Since last year, Samsung has finally dethroned Nokia as the world largest cell phone manufacturer, cutting into what little market share Nokia had left.
This June, the company announced another 10,000 jobs would be cut as it struggles to preserve cash. However its most damning news came when its September 5 release of its Lumia Windows phones failed to spark interest with investors, resulting in an immediate drop in stock price. Nokia bet the farm on the Windows 8 phone, and even Microsoft seems to be disappointed with the Finnish company’s performance, as rumors of a Microsoft-made smartphone are growing by the day.
To date, Nokia’s stock is down 47.20% to $2.55 per share, with no sign of improving in the immediate future. The once mighty phone giant is facing a seemingly impossible uphill battle against fierce competitors with stronger brands. It would take a either a stroke of genius or a complete miracle for the company to recover its place in the industry.