These 5 Terrible Stocks Are Crushing the Market

I got called out.

In a column back in July, I listed five terrible stocks that Wall Street rated as "buys." These companies had loads of debt and trailing losses and were trading near 52-week highs. Here's what that list looked like.

Company

Description

% of 52-Week High

Debt/Capital

Net Income (TTM)*

Analyst Recommendation

Virgin Media (Nasdaq: VMED  ) Cable and communications in the U.K. 95% 82% ($553 million) Buy
Sun Communities (NYSE: SUI  ) Manufactured homes 88% 110% ($6 million) Buy
Vonage (NYSE: VG  ) Telecom over the Internet 87% 138% ($34 million) Buy
Las Vegas Sands (NYSE: LVS  ) Casinos in Las Vegas and Macau 87% 59% ($302 million) Buy
US Airways (NYSE: LCC) Airline 84% 111% ($147 million) Buy

Source: Capital IQ, a division of Standard & Poor's. Based on figures as of July 16. *Trailing 12 months.

Seems simple enough that these companies should be avoided, right? That's exactly what I argued. Here's the problem. Motley Fool community member dragonLZ decided to look back and calculate the returns of these five companies since I pooh-poohed them. The result? As a group, they're all crushing the market. And not by a little, either. Las Vegas Sands has almost doubled! Check out these returns.

Company

Return since July 16

Virgin Media 41.1%
Sun Communities 20.5%
Vonage 3.3%
Las Vegas Sands 95.7%
US Airways 28%
Average 37.7%
S&P 500 8%

Source: Google Finance.

Even worse, I suggested that readers look into three companies with better fundamentals: graphics chipmaker NVIDIA (Nasdaq: NVDA  ) , seed and pesticide giant Monsanto (NYSE: MON  ) , and pharmacy Walgreen. Their performance?

 Company

Return since July 16

NVIDIA 12.3%
Monsanto 5.1%
Walgreen 14.6%
Average 10.7%
S&P 500 8%

Source: Google Finance.

If you're following along, you see that both groups are beating the market; however, the "terrible" companies are trouncing my group of higher-quality companies.

But I've got one more shocker for you. Even with my group's returns trailing by more than 20 percentage points, I stand by my call and think I'll be ahead over the next five years.

Why?
Let's remember that I made my call less than four months ago. Time works solidly against bad companies. And make no mistake, these five companies are bad.

  • Virgin Media: I'll make my case with two figures. Number of years since 1995: 15. Number of profitable years by Virgin Media since 1995: 1.
  • Sun Communities: This company is a REIT (real estate investment trust) that develops manufactured housing communities. Kind of a red flag when it reports losses throughout the height of the housing bubble.
  • Vonage: Vonage is to voice-over IP what NetZero is to Internet access -- increasingly irrelevant.
  • Las Vegas Sands: I have no confidence this casino will ever stop loading up on debt and growing for growth's sake.
  • US Airways: Basic rule of investing -- with a rare exception, airline stocks crash and burn.

In an up market like we've had recently (e.g., the returns for September were the highest for that month since 1939), the imperfections of these terrible companies are masked. But at some point, we'll experience difficulties. And when the tide ebbs, it'll be companies like these five that will be standing naked.  

A better option
I have nothing against trash-bin-diving, but sometimes what you get is just garbage. So I'll stick with NVIDIA, Monsanto, and Walgreen over these five terrible stocks.

For five more stocks picked by five Motley Fool analysts, click here to get our free report: 5 Stocks The Motley Fool Owns -- And You Should Too. I'll vouch for the last of the five stocks because it was my pick.

Anand Chokkavelu owns shares of NVIDIA and can't wait to talk to dragonLZ in five years to do a post-mortem. NVIDIA is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a synthetic long position on Monsanto. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (44) | Recommend This Article (99)

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 November 02, 2010, at 3:57 PM, spokanimal wrote:

    Anand,

    What you're missing (and what Buffett, Rothschild and Templeton didn't over the years) is this:

    You need to STOP looking for proven, sustained performance and jumping on the bandwagon with the "herd" and...

    ... you need to look for un-appreciated value combined with good potential, diversify yourself, and invest "uncomfortably" because...

    ... no "good" investment is "comfortable" and Walgreens and Monsanto are comfortable.

    All of history's most famous investors were "contrarians" who, by definition, always invest in "uncomfortable ugly" and flee from "herd-induced euphoria". or, as my grandfather put it...

    ... buy low and sell high.

    Spokanimal

  • Report this Comment On November 02, 2010, at 4:10 PM, perrrob wrote:

    While some people like you tend to look in the rear-view mirror ... I prefer to look ahead and make money. LVS is up 96%, that should tell you that something is wrong with your investment approach.

  • Report this Comment On November 02, 2010, at 4:15 PM, blesto wrote:

    I'll check back in 5 years.

  • Report this Comment On November 02, 2010, at 5:10 PM, TMFBomb wrote:

    @spokanimal,

    Very fair points. I just specifically don't like these companies. For a contrarian call on my part, check out this recent article:

    http://www.fool.com/investing/general/2010/11/01/its-time-to...

    -Anand

  • Report this Comment On November 02, 2010, at 5:30 PM, TMFBomb wrote:

    @kahunacfa,

    Yes, high debt is common in the casino and telecom industries. That's why many casino companies scare me. I worry about them because their operations rely on discretionary income yet they have to make regular interest payments.

    As for Vonage, those other high-debt telecoms have profits and pay dividends.

    -Anand

  • Report this Comment On November 02, 2010, at 5:49 PM, tzapa wrote:

    Spokanimal makes a great point - what seems like a great company for the next 5 years isn't necessarily going to net strong returns or actually turn out to be afe. Just look at the financial stocks - 5 years ago, the "herd" thought they were the best/safe investment. There's so much in flux these days - it's hard to predict the future. There's a lot of great companies that are really undervalued and great buys at a low price - and I'm happy to buy them on a down day and sell them a week or a month later at a 10-15% gain. I've been averaging $500/day using this time arbitrage strategy - it's done much better than the 9-10% I was getting by picking "safe" stocks.

  • Report this Comment On November 02, 2010, at 5:57 PM, 0gers1 wrote:

    THIS IS WHY I LOVE YOU FOOLS! Straightforward and honest about your strategies. Time will prove Anand right.

  • Report this Comment On November 02, 2010, at 7:37 PM, CashRulez wrote:

    Kahuna, CFA...Anund is a CFA too...wouldn't call him inexperienced.

  • Report this Comment On November 02, 2010, at 7:47 PM, afamiii wrote:

    Stocks can be divided into three groups.

    Dogs - no growth, no competitive advantage, weak management, no significant assets and no prospects. These should be avoided by all investors. and will deliver no returns.

    Safe & Sound - strong competitive advantage, high profitability, excellent balance sheet. These can be bought by investors with no or little experience and they will deliver decent (but not special) returns. There are two types of safe and sound.

    i) Dividend payers - these can be bought by even the least skillful investors (widows and pensioners) with little fear of loss.

    ii) Non dividend payers - the investor must be experienced enough to be able to asses whether management is making sensible use of retained earnings.

    Enterprising stocks - Growth stocks (William O'Neils specialty,) turnarounds, asset plays (one of Graham's key strategies,) safe and sound stocks that have problems (Buffet's specialty - before he got big). These stocks should only be bought by investors with superior knowledge, skill, experience and emotional control.

    If an investor can't consistently put their stocks in the right pile OR they can't properly assess their own level of expertise, they should go into an index fund using dollar cost averaging.

  • Report this Comment On November 02, 2010, at 9:06 PM, dlomax77 wrote:

    You could have made a lot of money on short squeezes alone when this rally began. Hedge fund managers will stay long until retail investors come back.

  • Report this Comment On November 02, 2010, at 9:40 PM, xetn wrote:

    "Las Vegas Sands: I have no confidence this casino will ever stop loading up on debt and growing for growth's sake."

    What does "growing for growth's sake" mean? It seems to me that all companies want growth. Is there some "evil" in this statement?

  • Report this Comment On November 02, 2010, at 10:27 PM, aleax wrote:

    @xetn, """What does "growing for growth's sake" mean? It seems to me that all companies want growth""" -- you need to run, not walk, to get Bruce Greenwald's classic "Value Investing: from Graham to Buffett and beyond" and *carefully* study his masterful analysis of growth and what it does to a company's value.

    Bottom line (but you do have to read Greenwald for the details and arguments): growth can be indifferent, positive, or DESTRUCTIVE of value -- depends on whether a company his growing "within its franchise" (with competitive barriers to competitors), in which case growth can indeed be good for the stockholder; on a level playing field (no competitive barriers), in which case it can at best be indifferent (negative whenever an acquirer overpays for an acquisition, negative whenever there's the slightest execution defect); or against competitive barriers (against a strong and awake entrenched competitor), in which case growth destroys value for the stockholder (since the cost of capital to pay for and maintain that growth is higher than the growth's returns).

    For the *management* of a company, growth is always great, as it enhances their power, builds up their little empire, increases their compensation (esp. the value of their generously awarded stock options): for the *owners* of a company, one needs to be much more critical and selective about, WHICH growth! A typical "agency problem"...!-)

  • Report this Comment On November 02, 2010, at 11:08 PM, JF125780 wrote:

    I have owned shares of LVS since inception and I know everything about this company except the insider information,

    The one thing you are missing is that Adelson, the founder and the insiders own 70% of the company.

    Sheldon Adelson is a multi billionaire and before the melt down, he was the 3rd riches man in the world. He also lent his company the necessary money to keep LVS afloat at 11% interest.

    There is no way this company will ever go bankrupt with his kind of money.

    Macau is now bigger than Vegas with only LVS and WYNN and MGM and Melco there.

    He is also in Singapore doing extremely well and plans to open in Japan if gambling is legalized there.

    Dan Kowkabany

  • Report this Comment On November 03, 2010, at 12:57 AM, julcion wrote:

    Perhaps the analysts use quantitative and technical indicators to select the best time to get into a stock is when it reaches a support level and to get out when it reaches a resistant level - making plenty of profit

  • Report this Comment On November 03, 2010, at 1:39 AM, gkehome08 wrote:

    Anand,

    >>As for Vonage, those other high-debt telecoms >>have profits and pay dividends

    I am no CFA, but note that last year Vonage added India to their World Plan for $25 per month with pretty much unlimited calls. That's a huge savings if you are an Indian and calling back home every week compared to what it used to cost with other carriers. Since then everyone I know of have stopped using calling cards or other international plans and have moved to Vonage world plan. I am guessing that's a significant number of subscriber addition. This might be one reason for some to consider a turnaround for Vonage.

  • Report this Comment On November 03, 2010, at 10:45 AM, Parthenet wrote:

    WRT Virgin Media perhaps you should look at the free cash flow and what they're doing with it, rather than just the debt/capital ratio

  • Report this Comment On November 03, 2010, at 1:16 PM, TMFBomb wrote:

    @afamiii,

    I like that breakdown a lot. And agree on indexing. I think almost every investor is better served either indexing completely or using indexing at the core of their porfolio. I personally have a large percentage of my portfolio in indexes.

    @aleax,

    Well put.

    @JF125780,

    How much of Adelson's personal wealth is tied to LVS? And what is the rest of his wealth invested in? Key considerations if Adelson is your backstop against LVS bankruptcy risk.

    @gkehome08,

    In the U.S., I'd worry about Vonage not only because of bundling from cable and telecoms but also because of lower-cost alternatives like Skype. What's the competitive landscape like in India?

    @Parthenet,

    Indeed, Virgin has been producing positive free cash flow as their capex has been less than their depreciation/amortization. Even lending credence to that and assuming it's sustainable, Virgin trades at a rich multiple.

    Great comments so far, everyone.

    -Anand

  • Report this Comment On November 03, 2010, at 3:33 PM, orlandotunes wrote:

    Anand, I just wanted to correct one of your 'two figures'... You're absolutely right that the number of years since 1995 is 15, but what I'm struggling to understand is the relevance this has with VMED??? VMED started trading in 2007 (number of years is 3, in case you was wondering) after taking over a couple of cable companies in the UK. So 3 years and 1 in profit doesn't sound sound too bad, especially in today's climate.... Also I think we all under-estimate the Virgin brand across the globe... and with all stocks graphs pointing to the sky, I don't think its such a terrible stock now, is it?

  • Report this Comment On November 03, 2010, at 4:23 PM, dragonLZ wrote:

    Ananad, I never said anything about your "avoid-these" companies are better than your "buy-these" companies for the next 5 years.

    Why did you pick 5 years, why not 1 or 3?

    1-3 years is enough to make a decent amount a money on an investement, don't you think?

    Who cares what will happen with LVS 5 years from now if I score a three-bagger a year from now?

    However, if that's the way you want to play, no problem - the bet is on.

    I have to warn you though: In case "my" stocks are still winning 5 years from now, expect to see a post by me with a title: Anand is wrong. AGAIN... :)

    p.s. I'm pretty confident LVS will still be outperforming your picks over the next 5 years. I like SUI too. Good Luck!

  • Report this Comment On November 03, 2010, at 5:15 PM, TMFBomb wrote:

    @orlandotunes,

    I can see the financials back to 1995 via Capital IQ, the software we use.

    @dragonLZ,

    Sigh. Even when I'm disagreeing with you, I find myself agreeing. Say LVS triples in a year but then it stands at a 50% loss at the 5-year mark. If you sold off at the high, I'd say that's a great investment. If you held the whole time, a terrible investment.

    I picked the 5-year mark because I think the longer timeframe favors a higher-quality company. So I'm willing to suffer your wrath in a 5-year lookback.

    Incidentally, if I'm wrong and you're right, LVS and SUI are the two that scare me the most.

    Good luck to you as well...either way, hopefully it'll be educational for both us!

    -Anand

  • Report this Comment On November 03, 2010, at 10:51 PM, mikecart1 wrote:

    VG won't exist in 5 years so you can remove that stock now. Company is more outdated than any other on the NYSE.

  • Report this Comment On November 04, 2010, at 5:49 PM, 808Peaches wrote:

    WOW!! This is the reason why I NEVER listen to analysts. I learned a long time ago to trust my gut feeling and invest in companies I actually use. You sound like the very same verbage I read in 1998 and 1999 about Apple! In 2002 about Netflix, when everyone was saying Blockbuster is the one, people want to be able to see and hold a dvd they are renting...and blah blah blah.

    I'm glad I didn't listen to all those advices then and certainly don't take your advice right now. I believe there were also many articles on Fool suggesting to not buy Ford and LVSands 18 months ago. Since I used to work at a Sands casino and always drive Ford cars, my decision to buy a boat load of stocks from those two in Feb and March of 2009 was an easy decision. Those 2 combined have brought me well over six figures and who cares what happens 5 years from now? Live life in the moment! You also may not be around in 5 years.

  • Report this Comment On November 04, 2010, at 11:46 PM, CommonStockSense wrote:

    Anand,

    Unfortunately, you overlook key points and also include factual errors in your article regarding Sun Communities. Your very strong negative stance is apparently based on only four observations, rather than an informed view.

    First, your description of Sun is incomplete: not only does the company develop manufactured housing communities -- more importantly -- it owns and operates an extremely large portfolio of these high-barrier-to-entry assets. From Sun's Web site: "The company owns and operates 136 manufactured housing communities in eighteen States - concentrated in the Midwest and Southeast portions of the United States. Sun Communities' portfolio consists of approximately 47,600 developed sites." Moreover, the company's stable operating model -- which generates significant recurring cash flow -- supports high levels of leverage. As of 9/30/10, debt to total capitalization was 65.3% and debt to gross assets was 73.9% (per supplemental package).

    Next, you state, "...Kind of a red flag when it reports losses throughout the height of the housing bubble." This statement is misleading as it uses the wrong earnings metric for real estate companies. You are correct that Sun has reported GAAP net losses through the years. Why? Like all real estate companies: large depreciation. Also, the 2004 recapitalization of an affiliate company, Origen Financial, LLC (mortgage origination, acquisition, and servicing for manufactured homes) which had subsequent troubles and also impacted the bottom-line through equity losses (including non-cash charges) that are rolled up into Sun's reported net income. Finally, the easy credit housing boom negatively impacted Sun's operating fundamentals since would-be tenants suddenly found traditional homes more affordable.

    HOWEVER, what really matters for real estate companies such as Sun are Net Operating Income (NOI), Funds from Operations (FFO), and EBITDA. As far back as I can remember -- and to this day -- Sun reported substantial, positive figures for each of these metrics. As an example, trailing twelve month FFO was $60 million (27% margin) and TTM EBITDA was $126 million (57% margin). In fact, good news for Sun (not so great for America): with the bursting housing bubble and ensuing recession, more and more Americans needed and still need affordable housing. Hence, all key metrics for Sun - revenue, NOI, property rental rates, occupancy levels, and rental home sales - have been improving through the downturn. Yet, you include no mention of fundamentals in your article.

    To see just how "terrible" this company is, I recommend reviewing Sun's 2009 Annual Report and Shareholder Letter. You'll see that Sun is a fantastic business for owner-oriented investors.

    Long SUI since December 2008.

    Jeffrey Walkenhorst

    Common Stock $ense

    http://www.commonstocksense.com/

  • Report this Comment On November 05, 2010, at 9:18 AM, shaileshnita wrote:

    It is a very good article. The five companies with large debt, that are outperforming the good one's may be due to investor psychology or hoard mentality (Analysts like them).

  • Report this Comment On November 05, 2010, at 10:56 AM, orchardhill wrote:

    Monsanto is a terrible stock even if it is making money. This company has no long term outlook with regard to the safety of its products, and it will eventually go down under its own hubris by marketing some toxic substance or genetically modified food with dangerous long-term effects, if it hasn't already put several out there all ready. I would never invest in this lawsuit magnet.

  • Report this Comment On November 05, 2010, at 10:56 AM, orchardhill wrote:

    all ready=already (d'oh)

  • Report this Comment On November 05, 2010, at 11:55 AM, Truth2Power wrote:

    In your defense, Anand, fully 14.4% of the "bad" companies' average is provided by LVS. If LVS had underperformed (or suddenly starts underperforming), your average will look much better.

  • Report this Comment On November 05, 2010, at 12:01 PM, Purpose808 wrote:

    Dang, this is why I never spend money on the Fool's so-called premium services. LVS is an obvious long bet. Macao will only get bigger, and the Sands will only make more money.

  • Report this Comment On November 05, 2010, at 12:02 PM, Truth2Power wrote:

    BTW, agree with CommonStock$ense that prefab/mobile homes would have been unlikely to do well in the midst of a traditional housing boom.

  • Report this Comment On November 05, 2010, at 12:18 PM, Purpose808 wrote:

    Oh did I mention that LVS is one of only 2 games in town in Singapore? And when Japan eventually legalizes gambling in the next 5 years, guess who will be the first one in line?

  • Report this Comment On November 05, 2010, at 12:28 PM, SSchweizer wrote:

    Anand,

    You may be right about Vonage going forward. However, I personally use them for my home voice over IP for one important reason: Their monthly rate is cheaper than that offered by other providers out there with comparable services and, unlike ISPs such as Comcast, their low rates don't end after 6 months or a year. Would I buy them as a stock. Maybe not this late in the game, but I can see how they've been able to hang on against the Titans they are competing against. Good luck, Steve.

  • Report this Comment On November 05, 2010, at 12:45 PM, Rollerofthedice wrote:

    There are times when, instead of after-the-fact justifying a mistake, one should just say: "I blew it!"

  • Report this Comment On November 05, 2010, at 1:21 PM, RegLeCrisp wrote:

    99.99999% of investors (including professionals) are dart throwing monkeys, the only difference is how expensive their darts are. The .00001% that are not are invariably discovered after the fact.

  • Report this Comment On November 05, 2010, at 3:54 PM, whadayathink wrote:

    Here's what I don't get:

    The advertisers recommending the purchase of gold, say you'd better buy gold as dollars are becoming worthless pieces of paper. But what do they take in exchange for the gold?... dollars they say that are becoming worthless pieces of paper.

  • Report this Comment On November 05, 2010, at 4:26 PM, whadayathink wrote:

    Sorry. I sat in the wrong pew.

  • Report this Comment On November 05, 2010, at 5:08 PM, BHIGuy wrote:

    The date you take your snapshot has a lot to do with the quality of your data. The market is pegging the top of its 200 day trading range, so one might expect high risk/high return stocks to look great and blue chips to look average.

    Give us the data for the day before the FED announced QE2 when the market was on bottom. How bad did the dogs look then?

  • Report this Comment On November 05, 2010, at 5:10 PM, BHIGuy wrote:

    Correction, the day the market started speculating on QE2

  • Report this Comment On November 05, 2010, at 7:17 PM, ramboris wrote:

    Good companies will always outperform bad ones in the long run. These 5 terrible stocks that you listed are only increasing in price because so many investors are speculating instead of investing in companies with solid fundamentals. Just wait, I can guarantee you that all of these stocks will drop significantly in the near future.

  • Report this Comment On November 05, 2010, at 11:13 PM, dragonLZ wrote:

    LVS is a star of this post here

    http://caps.fool.com/Blogs/does-anyone-remember-the/470013

    At the end of that post, there is another case of fundamental-investing gone wrong...

  • Report this Comment On November 06, 2010, at 11:38 AM, CommonStockSense wrote:

    Truth2Power, thanks... I should have noted that the less favorable fundamentals during the housing boom was probably a small component (impossible to quantify) of the loss. Depreciation is the major culprit. In fact, on a GAAP net income basis, Sun Communities is still reporting small losses even with extremely favorable fundamentals. BUT, as I indicated, through all years, Sun reported significant, positive NOI, FFO, and EBITDA. These are the correct measures to evaluate this high quality business.

  • Report this Comment On November 06, 2010, at 5:53 PM, geoglassman wrote:

    including sui (sun communities) as one of 5 terrible stocks is way off base. using net earnings which includes significant depreciation is simply not an appropriate metric for use when considering a reit like sun. it is far more appropriate to focus on their FFO per share, which has been steller over the last year and a half. the stock has doubled during this time because it pays a strong dividend, their expense structure is under control, and mobile homes are viewed as a reasonable alternative for many families looking for housing. long sui and expecting the stock to move past 40.

  • Report this Comment On November 07, 2010, at 5:56 PM, TMFBomb wrote:

    @ CommonStockSense and geoglassman,

    Agreed on the FFO being a superior measure than earnings for SUI. That has been generally quite positive through the years. The high leverage still bothers me, though.

    As I told dragonLZ in a previous comment, LVS and SUI are the two I fear will prove me wrong.

    I've enjoyed the well-reasoned arguments for SUI and will keep it on my radar to continue to assess whether I've underestimated this company (of course, based on its one-star CAPS rating, there seem to be a lot of arguments against it, too). If it does prove a winner in the next five years, I'm hoping the other four stocks can save me by seriously underperforming. We'll see.

    Fool on,

    Anand

  • Report this Comment On November 16, 2010, at 6:26 AM, BOBinChile wrote:

    Airline stocks crash and burn? What about your recommendation on Southwest Airlines LUV? More and more I am finding that the titles of these articles are sensational and the information is often contradictory. Just a point to consider.

    Ohm the last article that I read about not buying American was a good article in some ways, but the comparision between Ford and Toyota was plain stupid. Sometimes when a stock is as low as Ford was there is no where to go but up.

  • Report this Comment On November 16, 2010, at 6:27 AM, BOBinChile wrote:

    On other point concerning auto companies- did you every recommend TATA? I don't believe so- I think that you probbly should have.

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