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Stocks Best Left For Aggressive Speculators
With the current state of U.S. economy uncertain at best, investor anxiety still abounds. Yet, you would think by the valuations being afforded some equities today that we are in an economic nirvana. Despite the past record of growth and future promise of more growth to come, these securities offer no margin of safety and a high probability of capital loss going forward.
IN PICTURES: 5 Tips To Reading The Balance Sheet
Success in the Eye of the Beholder
SuccessFactors (Nasdaq:SFSF) provides cloud computing software for businesses. Yes, revenues have nearly tripled from $63 million to over $150 million, but as of year-end 2009, the company was still unprofitable. The market cap of SuccessFactors, an unprofitable company generating around $160 million in annual sales, is nearly $2 billion. This is a similar market cap to Deckers Outdoor (Nasdaq:DECK), an incredibly successful footwear maker with sales of nearly $1 billion and profit margins of 15%.
More so, the company is expected to earn a profit in 2010. Based on estimates, 2010 profits are expected to give the company a forward P/E of 230. So investors are willing to pay $230 for each $1 in profit meaning that the implied earnings yield is less than 0.5%.
Leave This Oil Play Alone
InterOil (NYSE:IOC) is an oil and gas explorer in Papua New Guinea, and for now, the stock is as speculative as its exploratory efforts in that area. Currently lacking profits, Mr. Market is valuing this company at $3 billion or a forward P/E of 190-times future earnings. Not sure why anyone would want to speculate on this when you have names like BP (NYSE:BP) fetching six-times forward earnings. Whatever the ultimate liability from the Macondo well incident, BP's ample cash flow should be able to bear the expense. ConocoPhillips (NYSE:COP) trades for less than nine-times forward earnings and pays an annual dividend of nearly 4%. Even if IOC were to triple its earnings estimates, it would still trade for over 60-times forward earnings.
The Bottom Line
Despite whatever rosy projections may exist of the future of the business, some valuations are just simple enough to avoid at all costs. (For related reading, check out How To Avoid Emotional Investing.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 5 Tips To Reading The Balance Sheet
Success in the Eye of the Beholder
SuccessFactors (Nasdaq:SFSF) provides cloud computing software for businesses. Yes, revenues have nearly tripled from $63 million to over $150 million, but as of year-end 2009, the company was still unprofitable. The market cap of SuccessFactors, an unprofitable company generating around $160 million in annual sales, is nearly $2 billion. This is a similar market cap to Deckers Outdoor (Nasdaq:DECK), an incredibly successful footwear maker with sales of nearly $1 billion and profit margins of 15%.
Leave This Oil Play Alone
InterOil (NYSE:IOC) is an oil and gas explorer in Papua New Guinea, and for now, the stock is as speculative as its exploratory efforts in that area. Currently lacking profits, Mr. Market is valuing this company at $3 billion or a forward P/E of 190-times future earnings. Not sure why anyone would want to speculate on this when you have names like BP (NYSE:BP) fetching six-times forward earnings. Whatever the ultimate liability from the Macondo well incident, BP's ample cash flow should be able to bear the expense. ConocoPhillips (NYSE:COP) trades for less than nine-times forward earnings and pays an annual dividend of nearly 4%. Even if IOC were to triple its earnings estimates, it would still trade for over 60-times forward earnings.
The Bottom Line
Despite whatever rosy projections may exist of the future of the business, some valuations are just simple enough to avoid at all costs. (For related reading, check out How To Avoid Emotional Investing.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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