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: