Thursday, February 7, 2008

HingeBear: Ten Underperforming Stocks

HingeBear is a selected list of ten stocks with the likelihood to underperform the market over the next 12 months.

A couple of earlier articles outlined stocks with a bullish case (Five Smallcaps Primed to Soar / HingeBull: Five more outperformers). This summary focuses on the opposite angle, stocks that investors should spurn from a long position perspective. While some of these stocks are in industries such as homebuilders that have rallied off of 52 week lows in the past few weeks, these particular stocks are likely to underperform their peers over the next 12 months. If you want exposure to these sectors then there are probably better upside candidates available.

These stocks were initially found using the HingeFire stock screener to search for stocks with struggling fundamentals and price declines over the past year. Further comprehensive assessment revealed poor balance sheets and declining growth outlooks, factors which will probably lead to underperformance over the upcoming year.

A number of these stocks appear to have limited downside left and may not be appropriate short candidates. A few of them have the potential for the second shoe to drop leading to further price declines.

The following stocks are included in the initial HingeBear list:

  • ALTU (Altus Pharmaceuticals Inc.)
  • AMGN (Amgen Inc.)
  • C (Citigroup Inc.)
  • HOV (Hovnanian Enterprises Inc.)
  • LNY (Landry's Restaurants Inc.)
  • MRVL (Marvell Technology Group Ltd.)
  • MBI (MBIA Inc.)
  • SLM (SLM Corp.)
  • WM (Washington Mutual Inc.)
  • RT (Ruby Tuesday Inc.)

Further brief commentary about each is provided below:

Altus Pharmaceuticals Inc. (ALTU)

Altus Pharmaceuticals, Inc., a biopharmaceutical company, engages in the development and commercialization of oral and injectable protein therapeutics for gastrointestinal and metabolic disorders.

Altus has roughly $150 million in net cash, yet it burned through $45 million in capital over the trailing 12 months. In December, the company lost a partnership agreement with Genentech for its hormone replacement therapy, ALTU-238.

While the company has rebounded from its low near $5 so far this year, the future outlook is not all that bright. There are better alternatives in the Bio industry for consideration as an investment.

Amgen Inc. (AMGN)

While AMGN beat the 4th quarter profit estimates, it had flat earnings and lower sales. The sales of many drugs are dropping off rapidly for the biotechnology giant. There is nothing in the upcoming forecast which demonstrates that Amgen will match either the market or sector performance.

Citigroup Inc. ( C )

CDOs anybody? This banking giant is in trouble for its inability to control risk. It is now in the position of wandering hat in hand to international sovereign funds looking for a bailout to meet capital ratios.

There is the possibility that the banking sector has bottomed out after the fourth quarter earning reports. However Citi is unlikely to perform better than the other banks during a sector recovery.

Hovnanian Enterprises Inc. (HOV)

With the housing sector in free-fall, nothing looks good in homebuilders. Hovnanian is one of the homebuilders with the weakest balance sheets and numerous impairments. Even if the sector recovers, Hovnanian is not expected to keep up in price appreciation. In fact from the straight-forward math, the company may face liquidity problems over the coming year unless sales increase – a scenario which is not likely in 2008.

Landry's Restaurants Inc. (LNY)

Decreasing sales, poor ratios, and financials that Moody’s downgraded to a “negative’ outlook on debt ratings in December. There is no information for this restaurant operator that can be described as promising. One recent twist is that Landry's boss, Tilman Fertitta, has recently proposed buying the remaining 61 percent stake in the business to make it a private business; it is not known if this proposal will pan out.

Marvell Technology Group Ltd. (MRVL)

Executive suite turmoil, losses, and no uplifting news. There appears to be no angle for this mid-cap chip maker that would provide any indication that it will match the overall performance of the market.


MBIA is a troubled bond insurer with a large SIV insurance exposure in the subprime mess. William Ackman of Pershing Square Capital Management recently outlined to regulators that MBIA still has an additional $12B of CDO exposure that has not been properly disclosed. The firm is desperately hoping that either regulators or an acquisition will bail it out. If one of these scenarios does not play out then it will liable be priced in the pennies like fellow insurer ACA Capital. If some sort of plan is arrived at then the stock price may increase from current levels.

SLM Corp. (SLM)

Sallie Mae can use an education on how to produce profits and run a fiscally responsible operation. This education financer has a long list of problems in the press over the past year and the situation is not expected to improve moving into 2008.

Washington Mutual Inc. (WM)

Washington Mutual is a large bank with a long list of troubles. It’s cousin Countrywide was recently purchased by BoA for pennies on the dollar. JPM Chase is currently mulling the acquisition of WaMu according to most press reports. If the bank does not get acquired then it is apt to sink further. On the other side of the coin any announcement about being acquired will likely elevate the stock.

Ruby Tuesday Inc. (RT)

Ruby Tuesdays recently cut its 2008 earnings outlook. This is on top of a second quarter earnings report (2008) showing same-restaurant sales decreased 10.8% and 8.7% at company-owned and domestic franchise restaurants. The statistics demonstrate falling revenue and earnings. Sometimes there is a reason that a trailing P/E of 7 does not represent value. There is nothing in the Ruby Tuesday’s information which would recommend it as an investment which will match market performance.

Disclaimer: The summaries provided at the HingeFire blog should not be construed as official investment advice.. You should see a qualified investment advisor if you need direct advice about your individual financial situation. The information provided does not constitute a solicitation to buy, or an offer to sell securities. The author does not hold a position in any of the securities outlined above.