Roundtable: The Stock to Sell Now

There are some really bad stocks out there.

It doesn't matter whether the recent positive stock market movement is the first sign of a recovery or just a bear market rally -- there are some stocks that are simply bad bets.

We asked a bunch of our Foolish folks to name one company whose price clearly exceeds its value -- i.e. their stock to sell now.

Brian Orelli, Motley Fool writer: Sure, the stimulus package had some money in it to encourage doctors and hospitals to go digital with medical records, but investors seem to be putting the cart before the horse with Quality Systems (Nasdaq: QSII  ) . The payments to doctors don't start rolling in until 2011, but the stock is up 36% on the year.

If this were a few years ago, I'd suggest letting the profits roll since there's still plenty of growth potential left for the industry. But the electronic health records space has gotten very crowded, with everyone from Big Blue to UnitedHealth Group trying their hand at getting doctors to digitize, and it's difficult to know how many of the potential customers Quality Systems will be able to grab. Investors would be smart to take their profits and find growth prospects with a bigger moat around them.

Nick Kapur, Motley Fool analyst: "Buy the rumor -- sell the news." That's a bit of Wall Street wisdom for you.

Rumor has it the new Palm (Nasdaq: PALM  ) Pre is going to be a blockbuster. And true to form, many investors have bought that rumor with a stock up about 900% since early December. Apparently, all one needs to save a company's stock are a few, glowing product reviews and a snazzy new interface, right?

Well, it's time to sell the real news.

A megapopular new product doesn't make a good investment. Just ask shareholders of Crocs.

Palm has done nothing to change the fact that it's a troubled company operating in a ferociously competitive industry. Even if the Pre does manage to live up to outsized expectations, entrenched competitors like Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) (plus newcomers Google, Dell, and Garmin) are unlikely to go gently into that good night. Let's not forget that customers beholden to long-term contracts with AT&T and Verizon may not want to pony up $250 cancellation fees just to switch to a second-rate carrier like Sprint.

Today is the period of maximum optimism for Palm and there's no reason to believe it can push through the price premium it's currently pushing when the rubber actually hits the road. Once that phone lands on shelves for a few weeks, all that optimism will disappear into the ether. Take your gains and get ahead of the news: Sell.

Rick Munarriz, Motley Fool writer: Shares of Lennar shot up 14% yesterday, on seemingly bullish news on the residential real estate front. Homebuilder sentiment is at an eight-month high, and housing affordability is improving. That's great, but why has Lennar nearly tripled since bottoming out in November? Helium alert!

The developer is still a couple of years away from its return to profitability. When it does, you'll hardly recognize it. There is a glut of foreclosed residences, and property-flipping speculators are burnt beyond recognition. Homebuyers are back, but they're drawn to free-falling prices and tax credit gimmickry. Construction costs haven't gotten that much cheaper, to justify building new homes in an overbuilt market.

Take the triple-bagger and run, my friends. This head fake is years away from a legitimate turnaround.

Alyce Lomax, Motley Fool writer: Chico's stock is up a whopping 370% in half a year, although it's difficult to understand why. Come on ... it's time to take the money and run, people, because I see no compelling signs this stock's a healthy one for long-term portfolios.

Chico's has been struggling for several years now, and the mature female shoppers it caters to are exactly the ones who will be most fiscally conservative in the current economic climate. Profits have been falling on an annual basis for several years running, and in Chico's last fiscal year, it reported a loss. Last year, its same-store sales plunged a whopping 15.1%. It's trading at a nosebleed 29 times forward earnings, when healthier retailers are trading at far cheaper multiples. Until there's compelling evidence that this company's really turning around its business, those who have rolled the dice on this stock should bail before their luck runs out.

Jim Royal, Motley Fool editor: American Express (NYSE: AXP  ) is my "shoe-in of the week," or my shoe-out, if you will. On Friday, Amex announced that its net charge-off rate climbed to 10.1% in April, following a stinky 8.8% in March. In April, credit card defaults were at record rates. Amex's recent performance occurred in a month that, historically, performs better for credit card issuers, as taxpayers receive their refund checks. Yet Amex (and most of the credit card companies) managed a worse performance.

How will the company fare when the employment picture continues to worsen even after the economy bottoms, as many economists predict? Cash-strapped consumers have increasingly turned to credit cards to get by, but as more customers get laid off, the possibility of greater charge-offs increases. Indeed, the company has had to cut off customers and even paid them for the privilege! At $26 a share, investors have polished this credit issuer's prospects too brightly, and are selling suede at leather prices.

Anand Chokkavelu, Motley Fool editor: I see Jim Royal's American Express and I raise him a Visa (NYSE: V  ) . Although Visa and MasterCard (NYSE: MA  ) don't have credit exposure like American Express does, their volumes will still suffer along with the rest of the credit card industry. Actually, my Foolish colleague Morgan Housel pointed out a few weeks ago that Visa already experienced a volume decline.

I view Visa and MasterCard as pretty much interchangeable -- they both have very similar, very amazing business models. However, buying great companies at terrible prices is no way to make a fortune. Visa and MasterCard are both richly valued given the turmoil in the industry, but Visa is much more so -- it sports a 7.7 price to sales ratio vs. MasterCard's 4.5. As I've said before, I'm patiently waiting for better prices on Visa and MasterCard.

More fun in the round:

This roundtable article was compiled by Anand Chokkavelu, who owns shares of Apple and Garmin. Apple and Quality Systems are Motley Fool Stock Advisor recommendations. American Express and UnitedHealth Group are Motley Fool Inside Value picks. The Fool owns shares of American Express and UnitedHealth Group. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (133)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2009, at 5:39 PM, Rg2scribe wrote:

    Palm needs what America, herself, needs now and going forward: A comeback. Both are on their knees and vulnerable currently. The only way either is going to resurge is to innovate its way out of their respective slumps.

    There are many who say Palm is too late to the market-relevance party, a once-respected originator of PDA wizardry who lost her way, lost her paranoia with regard to the competition, and fell victim to value migration. Does this sound a bit like America's story?

    They both lost their fear. And fear is a powerful driver of excellence.

    Steven Jobs, as great as he is, has fear in abundance. The perpetual, ever-evolving pace of tecnological change necessitates that technology companies constantly look over their shoulder while keeping a keen eye to market leadership. Fact is, no one or two companies should dominate a market (APPL, RIMM), where consumers are deprived of the innovation of their brethren, of competition.

    I love APPL products, and RIMM products, and various others, because the competition among them makes them all better--and we, consumers, the better for it. I love Palm, probably more for its story, its underdog position, more than anything.

    As an investor, I'm cautious to remove emotion from an investment decision; therefore, I don't want to invest in PALM based on sentiment, but with logical, having-researched-the-... common sense. Yet, still, I'm rooting for the "little tech that could" as a metaphor for America herself.

    I want GM and Chrysler to make breathtaking, emotive, roadworthy vehicles again (like Ford is doing with the 2010 Taurus and Fusion hybrid). Like PALM, many have said the door has closed on the American carmakers, their market relevance and American consumer trust evaporated--while China and India et al salivate at the prospect of ever-increasing world-markets share.

    Everyone's at liberty to be partisan consumers, to patronize a favored brand or company. But when some actually "root" for the demise of a home-grown American company such as a PALM--the many jobs and tax base the company represents--it's an interesting commentary, no?

    Surely, the market rewards innovators, deft managers, superior companies, and the market will have its say on PALM; does it have the chops to compete with the behemoths? Perhaps, perhaps not.

    For sure, it has the audacity to try.

    I'm pulling for PALM not simply for my inconsequential investment in the company (no matter what it does, I won't get rich). I'm pulling for it vicariously as I'm pulling for America herself.

    We need our companies to compete and succeed, all of them. When China or India become the dominant players on the world market, that's not good for America, no? Just as when AAPL or RIMM become the dominant forces . . . .

    PALM needs what America needs right now: A Comeback. I'm pulling for both.

  • Report this Comment On May 19, 2009, at 6:21 PM, FinancialFellow wrote:

    Ditto on unloading Palm. No way the PRE is that great. Blackberry, Moto, Apple, and a couple others pound Palm when it comes to smartphones. A 900% rise!? They've gotta come down. Good point on Sprint being a second rate carrier to VZW and AT&T (SBC).

    I also think that American Express and Visa are going to be hurt a bit by the new credit card legislation that just passed today.

    If you're looking for a place to move your proceeds after you unload some of the above stocks at their "good news" highs, I'd suggest taking a look at a return that boasts returns of 9%: http://financialfellow.com/2009/04/22/peer-to-peer-lending-o...

  • Report this Comment On May 19, 2009, at 11:34 PM, novicestocktrdr wrote:

    Four days ago, I became a new subscriber to the Motley Fool Stock Advisor. With the subscription, I received a special report for the month of May 2009 written by David and Tom Gardner. In it they describe "3 breakthrough stocks for profiting in 2009". One of them is Quality Systems - the first stock in this article which Brian Orelli recommends "taking your profits and finding growth prospects with a bigger moat around them". So on one hand this stock is a recommended buy and on the other, it is a recommended sell. So which is it guys, buy or sell? Sounds like one side is not talking to the other. I'm beginning to doubt the wisdom of my decision to purchase the Motley Fool Stock Advisor. I am a fairly new investor and I subscribed to the Stock Advisor for help in picking winning stocks to boost the performance of my portfolio but now I'm very confused. I would be grateful for any opinions on whether you think the Stock Advisor is worth the price they charge for it.

  • Report this Comment On May 20, 2009, at 8:21 AM, TMFGebinr wrote:

    novicestocktrdr,

    To answer your question about the seeming contradiction on Quality Systems, you have to realize what culture we have here at The Motley Fool. We take our name very seriously and, addressing the "Motley" part, we do not present a single company-wide point of view. We truly are investors writing for investors and, as such, look for and have several viewpoints among our various analysts and writers. We look for this because it is debate and thinking about different sides to an issue, even one as simple as buying or selling a stock, that we have found leads to the best results.

    It's also why we don't like the herd-like movement following the calls of an analyst as he or she issues an upgrade or downgrade. Why should a single person have the sole truth about a company and why should thousands of people follow that blindly? (Look at a company's stock price movements on the day of an analyst upgrade or downgrade to see what I mean.) Isn't it better to get several opinions, think about them, and come to your own conclusion? You don't have to be an expert to do that.

    Thus, in the report you mention are reasons to buy Quality Systems. Brian gave some reasons to sell Quality Systems. Which is right? Only time will tell, but before making a decision, we believe it would be best if people consider both sides of the issue.

    We're not here to give people the single right answer because there isn't any such. We're here to provide the best analysis we can and it is perfectly all right for different people to come to different conclusions.

    I would be happy to continue this discussion on the Stock Advisor discussion boards. Put a post up on the Ask the Stock Advisor Team board (http://boards.fool.com/Messages.asp?bid=117241) or the Stock Advisor Quality Systems board (http://boards.fool.com/Messages.asp?bid=117280) and we can talk some more.

    Cheers,

    Jim

  • Report this Comment On May 20, 2009, at 9:11 AM, blp317 wrote:

    Brian has misleading facts. QSII is not in competition directly with Big Blue or UHC. BCBS and UHC are trying to get physician practices to bill electronically and receive monies electronically. They do not care what in house software you are utilizing. In fact all medical practice use clearing houses to some degree before filing with insurance companies. NextGen ( QSII software product ) does so much more than billing. The most important piece is electronic medical records and charting, which interfaces with all hospitals and other practices. Keep your QSII it is a $90.00 stock in 52 weeks and will split. My practice will qualify for a large stimulus check because of NextGen, ( will almost cover the cost ). However, I will then give the money back in major tax increases. Obama healthcare giveth a little and taketh forever after.

  • Report this Comment On May 20, 2009, at 12:34 PM, PricePro12 wrote:

    Why would someone say to sell stock for the next 10 years..? You have to buy in order to sell. Right now is not the best time to buy either. I am playing with the Dollar stocks lately and it has been working out for me. There is another site i have been using called Greenfaucet.com which has stock market anyalsis that actually works

  • Report this Comment On May 20, 2009, at 1:09 PM, tomd728 wrote:

    Rule # 1.Listen to Jim Rogers (as suggested by arabianmoney).

    Rule # 2. When in doubt re-read Rule # 1.

    Hats off to my new best friend, arabianmoney.

    Tom

  • Report this Comment On May 20, 2009, at 1:16 PM, tomd728 wrote:

    Ooops I can't access Mr.arabianmoney web site to read commentary and make any suggestions therein.

    So.......just an acquaintance then.How impetuous is Tom ? Very, when it comes to sources of enlightenment !!!!!!!

    My apologies for double post as well.

    Tom

  • Report this Comment On May 20, 2009, at 2:43 PM, CAPTAINWACK wrote:

    SELL, SELL, SELL,SELL.

  • Report this Comment On May 20, 2009, at 2:43 PM, CAPTAINWACK wrote:

    SELL BIG SELL NOW

  • Report this Comment On May 20, 2009, at 5:53 PM, Toro240 wrote:

    Thanks to Nick Kapur for his analysis of Palm last evening. I bought July 10 puts this morning which are up 41% today.

  • Report this Comment On May 20, 2009, at 10:42 PM, FRINEDOFFOXY wrote:

    Tell me again why QSII is a sell. Is it their earnings? Their PE? Their ROE? Their growth rate? Their dividend too high? Their market share? Their debt load? Or could it be because their profits are driving their stock price? And by the way guys, just as is the case when analysts speak "downgrade" so it is when "roundtable" speaks "sell" which actually means "downgrade" knees jerk and a selling frenzy begins. No? Check the volume v the average daily volume for QSII at today's close. I say QSII is a buy rather than a sell.

  • Report this Comment On May 22, 2009, at 4:39 PM, 8k2u7FxK3QqlagX wrote:

    I agree that CHS has a lot of troubling issues, but I don't understand why you refuse in all of your recent articles to mention any of the positive changes taking place: Management shakeup, reduced capex, closing unprofitable stores and reducing inventory significantly at a charge to earnings, cost cutting, and the 37% increase in online and catalog that is not included in same-store sales. True, CHS still has a tough road ahead but I don't think you give readers a chance to begin making an informed decision when you present such a one-sided analysis.

  • Report this Comment On May 22, 2009, at 4:51 PM, profrls wrote:

    Anybody who thinks that their crystal ball isn't pitch black needs new specks. We all want Obama to succeed, but has he spent too much, and will China, India or other third world countries end up winning. Who knows. I say stay fully invested in very conservative venues. Look for reliable dividends and for stable high rated fixed income producers. I am up aboutg 15 % since Jan. 1, thanks to the fools suggestions, and I expect to continue to outperform the S & P!

  • Report this Comment On May 23, 2009, at 6:50 PM, JSinvestmentguru wrote:

    Palm has been a good handheld for writing electronic prescriptions, and it had to be synchronized with a PC (just the electronic prescription application). Palm devices were way ahead of Pocket PC's, IPAQ stuff. (but couldn't do folders-now has a files application that does folders that comes with new Palm handhelds as an add-on-works ok). Now the Ipod touch or iphone is on the scene, has a great files/folder application available for $6. It communicates well with the Mac. Also soon the electronic prescription applications will work directly with Iphone or wireless handhelds. I have a treo palm phone, a palm TX, and also the best palm ever made, the Zire 72. However, I have the epocrates medical software now on Ipod, and as soon as iscribe gets on, I can't really see using Palm any more. The Treo was a disappointment to me. The Tx is ok, but the wireless connections on the I pod Touch as well as the user friendliness blows Palm out of the water...I'm speaking here mostly as a physician that has used Palm handhelds for years for electronic prescriptions-I can write Rx's and transmit them direct to pharmacies any where there is a wireless access point that is open access or I have access (home, office, Starbucks, etc) But I think the writing is on the wall regarding the Iphone and Ipod-they are a better product and some companies already are going with them for electronic prescribing and downloading lab results .Buy Apple, if you're a chicken write some calls and get some of you profit now-but I keep having to roll mine up...On another front, look at the option prices on Deere stock. It's a 40-45 stock but the short term call is about $5, I think its a buy with an immediate sell of the covered write. Disclosure: -I'm long 595 shares on Deere and 800 Apple. I have 3 MAC laptops, (converted last year) but still have a lot of PC Toshiba, HP labtops. There are 4 Ipods of various types in my family, children, etc. I was the last to jump on an Ipod working through multiple cheaper devices first. Now its the most likely device to be on my person. I had a John Deere tractor to replace an old Ford 8N and a Deere riding lawnmover. The 8N bush hogs better if you can keep it running and that's a bit if-of course it's ancient and the Deere is new.

  • Report this Comment On May 27, 2009, at 3:59 AM, polenium wrote:

    Lennar filed for bankruptcy last June leaving taxpayers in the lurch for enormous projects they schmoozed their way into.

    They are one of the most dishonest and dangerous companies I've come across.

    They specialiize in shoddy construction, building on toxic land, endangering public health and sucking up public real estate through their connections in Congress and local government. They cheat local communities out of their rights and taxpayers in general. Even Erin Brokevich is after them.

    Companies like Lennar are why the housing market is in the toilet and why homeowners can't win for losing. They "bank" huge tracks of land and projects controlling markets and shutting out competition from reputable, local businesses.

    There are plenty of other opportunities out there without supporting this kind of cowboy capitalism.

    When the housing market recovers don't buy Lennar.

  • Report this Comment On January 10, 2010, at 2:37 AM, TMFAdmiral wrote:

    I love hindsight

    Amex now up around 60% since the sell call

    Just Saying :-)

  • Report this Comment On April 08, 2010, at 3:02 PM, acbill wrote:

    I believe the best buy in the stock market right now is the vix when it hits $16 or below. In late February one big trader, likely GS or the like, bought 50,000 put option contracts at the $20 strike on the vix for the March and April expirations in one day. This large player has been selling the vix daily since putting on that options position. The June vix $20 put is not yet a part of their play. The vix should spike above $20 in June and hit the $40-50 range again before March 2012 as commercial mortgage defaults spike. the SRS is also an excellent buy below $5.50 because of the pending mortgage defaults which Geithner warned of last week. The govt who has been propping up the market for a year will likely ban short selling when the market starts to crash again but the short inverse plays should not be affected by the ban and thse prices will likely rise sharply. An entry point will present during earnings season as earnings are expected to increase and probably will since "mark to market" accounting has been eliminated allowing banks and others to artificially inflate their balance sheets .The end of the FED induced "sugar high" bull run should happen when Spain and Portugal announce that they are like Greece, insolvent. Best of luck to everyone.

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