In Stocks Under $10, David Peltier seeks out stocks selling below $10 and identifies attractive investment opportunities. Stockpickr's Roberto Pedone also regularly highlights stocks in the under-$10 space.
But not all stocks selling below $10 present buying or investment opportunities. I’ve identified several that show no ability to appreciate in the futures and should remain in the single digits. These stocks are not necessarily on their way to bankruptcy, but they do not exhibit the qualities that are precursors to improving fundamental performance.
Don’t get trapped into thinking that these companies will resurrect their fortunes. Here are eight stocks under $10 (U.S.) to avoid.
Martha Stewart Living Omnimedia
I have a long history with Martha Stewart Living Omnimedia . I was one of the stalwart shorts when the company’s namesake, Martha Stewart, was on trial several years ago. Even many dyed-in-the-wool short-sellers were long Martha Stewart stock.
Stewart was later convicted and served time in a federal penitentiary. After being released from jail, she and the company engaged in many failed attempts to resurrect the brand and her image. Do you remember the failed Martha Stewart “Apprentice” show? These moves were well-publicized and caused short-term pops in the stock but resulted in long-term failure.
The company’s revenues have consistently declined since Stewart’s legal woes, and the balance sheet that was once cash-rich has deteriorated. Up-and-coming younger personalities such as Rachael Ray are supplanting Stewart.
Recently, the company announced an agreement with J.C. Penney whereby the department store agreed to buy 11 million new shares at $3.50 each amounting to a 16.6 per cent stake. The hope is that store-within-a-store and online sales of the Martha Stewart brands would bolster results for both companies. Martha Stewart stock is up nearly 50 per cent since the deal was announced. I am not a buyer of the euphoria as I have seen this movie before.
Live Nation Entertainment
Live Nation Entertainment is involved in the promotion of live concerts, operates concert venues and sells tickets. Live Nation has lost money in 13 of the last 23 quarters and is expected to do so in the current quarter. The company seems to fare well only in fair-weather months. Has it heard about indoor arenas?
This is a very tough business, which is increasingly finding that live entertainment is more costly to operate, too expensive for consumers and has to contend with competition from modern digital technology and a operate in a less than robust economy. Consumers with the most purchasing power tend to be the baby boomers who seek out concerts to hear their favorite singers or bands from their youth but unfortunately those opportunities are diminishing over time. They would rather stay home and watch a concert on their 60 inch flat panel TV.
One big bet on Live Nation comes from Chase Coleman’s Tiger Global Management, which increased its position in the stock by 31 per cent to 15.7 million shares in the third quarter.
Cadence Pharmaceuticals develops and markets an intravenous form of acetaminophen or APAP. Over the years, many companies have come and gone with the promise of developing and selling the next great painkiller. A hot stock several years ago was Penwest Pharmaceuticals, which never delivered to shareholders and wound up being purchased by Endo Pharmaceuticals.
Cadence has virtually no revenue and has lost money for years. I do not see how this company will succeed where others have not. About the only positive is that Cadence has some cash on its balance sheet, but I am not certain that will last long as cash burn is very high. In fact, just last month, Cadence had to sell more stock in order to raise cash.
Of all the companies I’m featuring here, Sprint is the only one that is also on my list of the 11 Worst-Run Companies of 2011.
The company’s cash flow from operations has deteriorated for years. Sprint’s Z-Score of -0.63 indicates that the company is at risk for bankruptcy.
I won’t want to waste any more time or space by beating this dead horse other than to add that it is definitely one to avoid.
Federal Signal is, according to its own web site, “a leading global designer and manufacturer of products and total solutions that serve municipal, governmental, industrial and institutional customers.” The company makes products such as lighting systems, license plate recognition systems, parking systems, sewer cleaners, street sweepers and industrial cleaning systems.
Don’t get me wrong – Federal Signal makes great products that are very necessary for our society to continue to operate and manage. However, its core customers are under a tremendous amount of budgetary pressure, which will result in years of fiscal belt-tightening. Some municipalities have filed or will file for bankruptcy. The federal government is cutting back its assistance to state and local governments.
I don’t see how this company will grow from here given the headwinds that it faces.
Why buy the cow when you can get the milk for free? Real Networks provides digital media products and services, which is indeed a growing segment of technology. However, Real Networks, best known for its RealPlayer technology, is losing the war in digital communications.
With companies such as Microsoft and Apple giving similar and substitutable products to its users for free, the Real Networks business model is flawed. Revenues have steadily declined and the company consistently posts quarterly losses.
Callaway Golf is a former fad stock of the 1990s when its Big Bertha driver hit the market and was a favourite of every Wall Streeter on the golf course (and in the analyst room). However, the company’s fortunes have been well below par for many years. Golf equipment companies such as Nike’s, Mizuno, Cobra and TaylorMade have been able to develop equally excellent products in the last 15 years. Tiger Woods, before he got into his personal problems, had a long-term endorsement deal with Nike.
While golf is still a very active sport across the world, country clubs have been hit hard ever since the financial crisis took place and are struggling to maintain membership. Callaway Golf’s revenues have been flat to lower for years and EPS has been negative since 2009. Even if the company posts the modest 18 cent profit that analysts expect in 2012, I do not think that the company is a worthy investment.
Dynegy is in the business of producing and selling electric energy and services in the U.S. The electric utility business is very competitive and is also highly regulated. Dynegy has a poor earnings track record and its revenues have been in steady decline for years. The company has embarked on a long-term plan to sell assets in order to remain competitive.
However, one of the most important metrics that utility investors look for is dividends. Dynegy last paid a cash dividend in 2002. In order to prop up the stock price, a 1-for-5 reverse stock split was issued last year. Why buy Dynegy when you can purchase a more consistent company such as Con Edison , which not only earns money but has raised its dividend every year since 1974?
Scott Rothbort has over 25 years of experience in the financial services industry. He is the founder and president of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site, and publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a professor of finance at Seton Hall University’s Stillman School of Business.