4 Winners That Will Be Losers

Wall Street sure knows how to put on a halftime show.

Reviewing some of the best-performing stocks during the first six months of the year can be a real head-turner. Could you have ever imagined restaurants, telcos, coffee beaneries, and even an auto giant among 2009's biggest stars?

Well, going over the list of hundreds of companies that more than doubled during the first half of the year, we can see that a lot of the star performers appear vulnerable. The stocks have come up, but now it's time for the comeuppance.

I'm going to review four of the high-flying stocks that I feel are gliding too close to the sun. You may not agree with me, but that's what the comment box down below is for.

Palm (Nasdaq: PALM  ) : Up 440% through June 30
I'm seeing a lot of full-page Palm Pre ads these days. Targeting Apple's (Nasdaq: AAPL  ) iPhone owners, the ads point out that many of their contracts are up, just in time to switch to the sleek new Pre smartphones. The ads also note the pricing disparities between the competing wireless plans.

There's a flaw in the strategy, of course. The iPhone owners who are wrapping up their two-year contracts are the early adopters. These are the Apple fans who paid as much as $599 for their phones. If they want, they can now upgrade to a speedier 3G version of the phone with the same 8 gigabytes of capacity for just $99, or go all out for a video-recording 3GS with greater storage capacity for as little as $199. Many have also invested in App Store programs, so they're financially vested in the iPhone platform.

It's going to be hard for any smartphone -- even the envelope-pushing Pre -- to woo them away. Perhaps that's why Apple cleared a million new iPhones in its debut weekend, while research firm JRPG figures that Palm moved just 84,000 units. The same firm expects 1 million to 1.2 million Pre smartphones to be sold this year. That's a great number, until you consider that the tally is less than the number of iPhones or BlackBerrys sold in a single month lately. This is a huge point. There are a finite number of people who can afford the costly data plans that make smartphones tick, and the Pre figures to be little more than a niche player.

Cynics will rightfully point out that I turned bearish on Palm in my "Throw This Stock Away" column nearly two months ago, when the spunky portable-computing pioneer was trading at just $11.17. It has risen by 33% since then. But I still stand by my bleak thesis. Once the buyout rumors fade away and the reality sets in that the Pre isn't conquering the world, Palm will surrender some -- though clearly not all -- of its first-half gains.

Diedrich Coffee (Nasdaq: DDRX  ) : Up 6,506%
I didn't mistype. Diedrich really started out the year as a $0.36-per-share penny stock, and it closed at $23.78 six months later. The recipe to this jaw-dropping 66-bagger isn't necessarily homegrown. Diedrich is one of the many K-Cup coffee suppliers for Green Mountain Coffee Roasters' (Nasdaq: GMCR  ) Keurig single-cup brewers. In its latest quarter, sales to Green Mountain soared by a whopping 96%, accounting for the company's growth.

Keurig is hot. Green Mountain has sold nearly 1.2 million brewers -- not to mention hundreds of millions of K-Cup portion packs -- during the first six months of its fiscal year. It's great that Diedrich is one of the many java-sourcing beneficiaries, but even Green Mountain's stock has risen by a more mortal 129% through the first six months of 2009.

Diedrich has become more than just a piggyback play: It has become a pig. The K-Cup-fueled turnaround is real, but what will happen as more coffee brands hop on the K-Cup bandwagon? Green Mountain is the royal play here. Don't believe the coattail hype.

Ford (NYSE: F  ) : Up 165%
Among the three domestic automakers, Ford is often portrayed as the healthiest. It hasn't been as much of a panhandler as General Motors and Chrysler have. It has a good chance of skirting bankruptcy -- something that obviously can't be said of the other two American automakers.

And there's the rub, my little hubcap. When GM emerges from bankruptcy, it's going to be in better shape to compete against foreign and domestic automakers.

Along the way, the auto market is still sputtering. Consumers are still weary of big-ticket purchases, and even idled factories and shuttered showrooms aren't eradicating the supply glut of new cars. Did I mention that the improving quality of cars is also lengthening the life expectancy of new rides? Yes, I said that with a straight face.

Builders FirstSource (Nasdaq: BLDR  ) : Up 172%.  
If you think banking on new-car demand is a poor bet, imagine corralling all of your chips around demand for new homes. Builders FirstSource is a supplier of structural building products to the residential real estate industry.

You may have seen glimmers of hope on the housing front lately. Developers are posting narrowing losses. Order cancellations are down. Home prices are also starting to stabilize. None of these things ultimately matters, though. There is still a glut of existing homes. Speculators and condo-flippers who treated real estate like a Monopoly board game are clearing out, and it may take years -- yes, years -- before there's a buoyant new housing market at construction prices worth exploiting.

Analysts see revenue falling by 30% at Builders FirstSource this year. The few analysts following the company don't see profitability until 2011 at the earliest. If you really want some skin in this game, consider home-improvement superstore chain Lowe's (NYSE: LOW  ) . It's at the mercy of many of the same catalysts, but at least it's consistently profitable.

Better ways to ride winners:

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz always sticks around for the halftime show. You never know when a wardrobe malfunction will happen. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (11)

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 July 09, 2009, at 12:27 PM, hongchang wrote:

    Diedrich is one of the many K-Cup coffee suppliers for Green Mountain Coffee Roasters' (Nasdaq: GMCR) Keurig single-cup brewers.

    How many is many? There are only 4 suppliers in total who were entitled to see K-cup. Get your fact straight before you publish such stupid statement! Bringing too many players into supplier chain will destroy GMCR itself and you are guranteed that they won't do it.

  • Report this Comment On July 09, 2009, at 12:41 PM, jmack3388 wrote:

    The mistake that is made over and over is painting the former "Big 3" with the same brush. Ford started the process of becoming a new company over 3 years ago when they hired an outsider as their CEO. Alan Mulally has appeared in many trade magazines where he has been nominated several times for Executive Of The Year. Ford's quality is as good as anyones (Consumer Reports, JD Powers, etc) and they are building their platform on quality, fuel economy and value. To me, Ford is the only one pulling this off. Their product cycle is also very favorable and they have high quality, fuel efficient vehicles on the way. What gets me is that most "experts" talk about the need for new product with high quality, etc. and never acknowledge that it takes 4+ years to run through a product cycle. In the hearings on Capital Hill, it looked like Ford already has their act together and the product was designed years ago and will be hitting the dealers. Chrysler looked like they have nothing coming at all and taht could spell trouble for them. GM looks like they are where Ford was 3 years ago and are going to try and do what Ford did. The problem I see is they don't have an Alan Mulally. Time will tell. To me Ford is a completely different company and now should be compared to Honda and Toyota and not GM or Chrysler.

  • Report this Comment On July 09, 2009, at 12:42 PM, optomist1 wrote:

    regarding Ford flying to close to the sun...I agree; heartedly, it may be that GM and Fiat/Chrysler will be in a better position to compete than Ford. Although I have yet to see real change regarding hourly and salaried cost structure as well as legacy costs. The buy American Mantra is of little value as many of the Detroit three vehicles are produced in Mexico/Australia etc.

  • Report this Comment On July 09, 2009, at 12:44 PM, bchrobuck wrote:

    Do you have knowledge of the auto business?? Sounds to me you know very little and are just being lazy and topical.Who has sold more cars and trucks in the USA in the first six months of this year Ford ?? or Toyota ?? Who's market share is rising every month ?? Sounds to me you are all hat and no cattle...guess I can be lazy too.

  • Report this Comment On July 09, 2009, at 1:01 PM, newengland2 wrote:

    For the past weeks, writer from Motley Fool always against PALM. I feel sad for this writer (poor guy) that missed huge gain for this potential stock. I got in at $4.5, and in-and-out many times with 3000% gain. The Pre is the best and powerful smartphone for now. Currently, the market share is about 5%. For next 6-12 months, if the market share increase to around 8%. Do the math for youself, the price will reach above $25. Here has not mention the new device is in the pipeline, and OS software.

    (What kind of school the poor writer came from? How much the GPA he was?)

  • Report this Comment On July 09, 2009, at 1:54 PM, mhagman wrote:

    Rick,

    Ford's global market position steadily declined fromthe 80's until the new regime took over and decided to "re-tool". They began to build smaller cars globally (which has saved them). They began to make better cars (Focus, Fiesta, Trucks). I beleive they were then tooled for the current market and prepared for the future market. As you will notice Ford's market share is now gaining. I don't believe your analysis to be correct that it is going to lose more market share to a restructured GM. They just won't need the governments help to survive and as such I believe Americans in general will view that more positively and give them a second look whereas that may not occur with GM and Chrysler.

  • Report this Comment On July 09, 2009, at 2:11 PM, kinnedie wrote:

    Accountants, attorneys and the government running automakers is a sure formula for failure. This is the case at GM, Chrysler, Toyota and Nissan. Ford will continue to increase market share world wide. "All hat and no cattle" says it right, you guys had better start doing your home work. The biggest argument against Ford is the debt that they will have to absorb, while there competitions just walked away from their stock and bond holders. Time will only tell, if the investors that lost their savings will be enter the mix.

  • Report this Comment On July 09, 2009, at 2:42 PM, photo412 wrote:

    Ford will do just fine and have invested in them accordingly. I believe your advice is quite like the Duke brothers in 'Trading Places'. Empty. Yet people keep paying for it.

  • Report this Comment On July 09, 2009, at 2:51 PM, sondo1313 wrote:

    Weak knowledge of the car industry! So what if GM is financially healthier in three or four years? What products are in their pipeline in 2009, 10 and 11 to compete with Fiesta, (Euro) Focus, Fusion and others? Ford will recover to its 2008 highs ($8.50) and beyond merely on the strength of its market share in a recovering sales environment, even if it takes until late 2010. What does GM's balance sheet have to do with that? Answer please.

  • Report this Comment On July 09, 2009, at 2:54 PM, OhPlease32 wrote:

    I am amazed that a company like Ford, who I do admit to owning stock in, is being criticized by another "expert" for conducting its business in a legal and moral manner and not asking for a handout. Chrysler filed for bankruptcy, screwed a bunch of bondholders(who frankly deserved to be screwed), forced the unions and creditors to take pennies for what they were owed and left in tact. GM is about to do the same. Ford is to be demonized because they didnt ask for a handout? they wont be able to compete with the new GM? Please.... Ford is well on its way to retooling both its business plan and its vehicles, something started long ago, before it had to come hands out to the goverment... and big deal, GM and Chrysler got concessions from the unions, ones that were agreed to for all 3 automakers, but werent going to take effect for another year and a half....do you really think that when Ford hits the bargaining table opposite the UAW, that they arent going to get the SAME concessions the other two have gotten???? Ford is simply making better cars, under a better business model... they'll get the same deal from the unions....they had no where near GM's legacy costs.... and yes, numbers boy....Ford is up a "whopping" 165% for the year....so it must be ready to fall..... ESPECIALLY if you listen the the experts here who tell you that companies like Ford deserve lower stock prices for not asking for a handout and conducting their business properly

  • Report this Comment On July 09, 2009, at 3:34 PM, kuaeroengrg68 wrote:

    jmack3388: Well said! Mulally and I were undergraduate classmates. He was not quite the top man in terms of GPA, but he was by far the most self-assured, with non-stop energy and aggressiveness that bordered on obnoxious.

    You suggest that we should compare Ford to Honda and Toyota, not to the rest of Detroit. I think there is a good chance you've nailed it. Mulally caught heavy flak in this country when he went to Japan to meet and talk with their best CEOs. What he saw and heard there reinforced his beliefs as to what is needed to compete. The line in Detroit had always been, "Don't sell the steak, sell the sizzle." He came back saying of the Japanese, "Never have I seen so much steak, and so little sizzle."

  • Report this Comment On July 09, 2009, at 3:42 PM, johnnymaynard wrote:

    I think you are wrong about Lowes. The key to survival for housing related stocks is cutting costs. Eventually, this thing is going to be over, even though it may be 2012 before that happens. But, buying Lowes because it is "consistently profitable"? Balderdash!

    It astounds me how people continue to invest in what are now junk stocks, thinking that the past will predict the future. Not only that, but they are paying prices that are set in such high P/E multiples that one would think we were still in the middle of the housing bubble.

    Companies, like Lowes, for example, are selling at P/E ratios of 16 to 1, and are probably as doomed as General Motors. Such dinosaurs keep looking in the rear view mirror, and cannot see what is ahead of them. Lowes is expanding and increasing its costs in the midst of the worst real estate depression in history.

    Companies like Home Depot, which are deeply cutting costs, will not only survive, but will do much better, a few years hence, than they are doing now. Their rivals will go bankrupt and they will have whatever is left of the market for themselves.

  • Report this Comment On July 09, 2009, at 4:13 PM, FZ6 wrote:

    Rick, if there is enough business to compete for, GM still has frictional issues to overcome that F does not. Thru the bancruptcy process they have created a huge rift with the unions/suppliers, employee morale must be at an all time low, and their approach to global competition is not rock solid. Just shedding some debt does not make GM a better company. And F has some very viable products that already compete, including their hybrids. My money is on a F comeback.

  • Report this Comment On July 10, 2009, at 8:04 AM, jmack3388 wrote:

    KUAEROENGRG68 - great comments. I know that Alan Mulally was a desciple of the "Toyota Way" manufacturing process when he was at Boeing. He is not wavering from his initial model of quality, fuel economy, safety and value. There is always a market for that and to this point he has executed his vision brilliantly. I do believe that Toyota has gotten too big too fast and is seeing growing pains (recalls, dealers too big to be profitable in this slow turn, etc). Looks to me that Ford is going to "Out 'Toyota' Toyota". I think that would be great. Seeing an American company on top would be nice. I have seen so many analysts with negative feedback and not a lot of knowledge on the facts say to sell Ford at $2 per share - Jim Kramer for example said it was a loser. Glad I listened to my own instincts and did my own research, I bought stock at less than $2 per share and it is now at $5.63 - up ANOTHER 5.23% yesterday. I've made a nice chunk of change and am not selling any time soon. EVERY indication is that Ford has it's act together. If the economy ever comes around again and/or "Cash for Clunkers" increases the amount of buyers in the market like it did in Europe - Ford's market share trend, quality, momentum could make for a another great run for Ford.

  • Report this Comment On July 10, 2009, at 8:37 AM, ctxinsider wrote:

    You obviously have NO CLUE about BLDR! I have friends working for them and they are as efficient as it gets! The word is they will be break even by Q3 in the worst housing bust in our lifetime. Not to mention they have a pile of cash. You've seen BMHC and Stock go to crap, while BLDR is far and away the class of the field in cash and asset management. Mark my words with the management they have in place this compnay is a diamond in the rough.The stock will be a double by end of Q1 2010. You heard it here first!

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