Throw This Stock Away

This weekly column is all about detours.

It starts when I pick out a stock that I think is a road to nowhere. My discussion will naturally upset some readers, particularly those who own a stake in the equity that I'm dissing.

But I don't just abandon you at the flashing barricades, left to yourself to drive your way out of this mess. No, I reroute you, by suggesting three stocks that I think will give investors some smoother roads to travel.

Who gets tossed out this week? Come on down, Avis Budget Group (NYSE: CAR  ) .

This fast CAR is a clunker in disguise
When it comes to stocks that have rocketed since bottoming out in March, it's hard to beat Avis. Lucky gamblers who paid as little as $0.34 a share for the stock in early March have been rewarded well, treated to a scintillating 30-bagger.

I hope they enjoy the bragging rights, but they shouldn't get used to the air freshener.

The auto-rental industry is in sorrier shape than Avis' buoyant share price suggests. Even the media is distorting the grim reality, if we go by yesterday's misguided interpretation of priceline.com's (Nasdaq: PCLN  ) quarterly report. Shares of Avis -- along with those of rivals Dollar Thrifty (NYSE: DTG  ) and Hertz (NYSE: HTZ  ) -- traded higher yesterday, after Priceline disclosed a 15% spike in car-rental days for the three-month period that ended in June.

Sounds impressive, but you'll poke an eye out with that extrapolation. Priceline is a story of market-share gains, not of travel-industry vindication. Priceline saw a 44% spike in hotel-room nights, but that doesn't mean your local hotelier is seeing any extra business in the front lobby.

In fact, forgetful investors who bid up Avis as a result of Priceline's report already had their metric. The car-lending behemoth posted its second-quarter report last week. During the same three months that found Priceline booking 15% more car rental days, Avis suffered a 21% decline.

The quarter wasn't anything to justify a stock chart that's been climbing since March, with Avis posting a small loss as revenue took a 17% hit.

No, Avis isn't dead. Cost-shaving initiatives have the company racking up $400 million in annual savings. Commercial account retention is high. Truck rentals are holding up better than its car rentals are. It's also in compliance with its debt covenants -- something that seemed in doubt when the economy was sputtering.

Avis will survive, but that doesn't mean it will thrive.  

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Ford (NYSE: F  ) : Some observers believe that the "Cash for Clunkers" program is benefitting Avis. The auto-rental agency eventually has to weed out the older cars in its fleet, so it's at the mercy of the used-car market, where it often auctions off its tired vehicles. And since "Cash for Clunkers" trade-ins are being shredded, the line of thought goes, there's less competition for Avis in the resale market. I don't buy into that theory. The "clunker" owners who would have normally turned to used-car deals are using the $4,500 rebates toward new cars. Newer cars are also easier to maintain, so repair-related rentals are less likely. If you want to play the "Cash for Clunkers" game, the clear winners are the automakers. Ford isn't necessarily the world's best automaker, but it is this country's strongest carmaker. 
  • Sirius XM Radio (Nasdaq: SIRI  ) : Satellite radio's fate is also tied to the success of the auto market, where most of its activations are coming from these days. Sirius XM has also hacked away at its once-bloated overhead, and dramatically so, given the post-merger synergies between Sirius and XM. The company is improving its cash flow and at least hanging on in terms of revenue growth.
  • America's Car-Mart (Nasdaq: CRMT  ) : If there's a used-car play to be found in the shredding of aging gas guzzlers, it's likely this force in the low end of the distressed auto-resale market. America's Car-Mart is very profitable, even blowing past Wall Street's profit targets in its most recent quarter. It's a bargain, too, with its shares trading at just above 12 times this fiscal year's projected profitability and less than 10 times next year's forecasted earnings.

Be a responsible driver.

Other headlines out of the weekly garbage:

Do you like Rick's substitutions? Would you rather stick it out with the tossed company? Are there other stocks Rick should look at in future editions of this column? Let him have it in the comment box below.

priceline.com is a Motley Fool Stock Advisor selection. Give the newsletter service a test-drive, to see how it handles the market's curves, free for 30 days.

Longtime Fool contributor Rick Munarriz is perfectly happy with his 2006 GM car. 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 (3) | Recommend This Article (10)

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 August 11, 2009, at 6:52 PM, plange01 wrote:

    car,dtg and even poorly run htz had a great run but all are far overvalued at this point and a strong sell on all as short sellers are moving in...

  • Report this Comment On August 12, 2009, at 5:21 AM, jjun0366 wrote:

    I was surprised to read the following.

    "Lucky gamblers who paid as little as $0.34 a share for the stock in early March have been rewarded well, treated to a scintillating 30-bagger."

    Considering how beaten down the company was, there was no way CAR was worth 30cents. To call it gambling when investors buy $1 for 3 cents is absolutely ridiculous.

    I suppose if you see a $100 bill on the street you would walk by because it's "gambling".

    cheers

    http://www.oldschoolvalue.com

  • Report this Comment On August 13, 2009, at 3:34 PM, TMFBreakerRick wrote:

    jjun, the "lucky gamblers" refers to the sentiment at the time that CAR was going to file for bankruptcy.

    Obviously, it didn't. And obviously, it's worth more than $0.34 a share in light of that. I still think it overshot its mark.

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