5 Companies You Love That I'm Betting Against in 2012

The stock market is a dynamic place to invest. You have to be able to balance future expectations with past performance and somehow come up with a valuation that makes sense. However, sometimes this doesn't work and we wind up with violent swings in the market as we've witnessed since July.

As much as we'd like to "set-and-forget" our portfolios, with the Internet making company-specific information easier to obtain and trading costs falling, it's becoming easier for the average Joe and Jane to get involved in the market. As much as I like the idea of more people investing in their future, it's also had the adverse effect of increasing volatility, because there are just as many uninformed traders moving the market as there are seasoned investors.

So as we near the end of 2011, I've decided to take a step back and take a closer look at five companies that have been strong performers over the trailing-12-month period that I feel could be knocked off their high horse in 2012. Under normal circumstances these stocks work as great set-it-and-forget-it long-term holds, but I'm predicting they will vastly underperform the S&P 500 next year.

Altria (NYSE: MO  )
I know...blasphemy! Who in their right mind would ever bet against our greatest sin, smoking? Me, that's who!

Altria is a shell of the company it once was. The days of rapid growth have been crushed by the U.S. government and its increasingly aggressive antismoking legislation. In 2012, U.S. cigarette manufacturers will be required to place noticeably larger warning labels on their packaging noting the dangers of smoking, which can only be seen as a negative for the industry as a whole.

Altria continues to do what it can to keep long-term shareholders happy, including share buybacks and dividend increases, but you can only play this game of smoke-and-mirrors for so long before shareholders get wise. There's simply no growth left at Altria. Since 2007, Altria's market share in the U.S. has hovered in a very tight range of 49%-51%, but cigarette volume remains constrained. Altria also announced just last week that it would be laying off 15% of its workforce in response to a decline in sales. This doesn't bode well for Altria in 2012, and I'd suggest Altria's best days may be behind it.

GlaxoSmithKline (NYSE: GSK  )
The patent cliff is a worry for all major pharmaceutical companies, but none more so than GlaxoSmithKline, which is facing the prospect of one-quarter of its revenue being at risk of generic competition by year's end.

Glaxo's two blockbuster drugs, Advair for the treatment of asthma and Avandia for treating diabetes, are scheduled to lose patent exclusivity prior to the end of 2012, and there's not much Glaxo can do about it. The only saving grace for Glaxo thus far has been that no pharmaceutical company has been able to produce a generic version of Advair yet, but I'd say it's just a matter of time before it happens.

Even more of a head-scratcher is Glaxo's valuation, which, for a pharmaceutical, isn't cheap. With the majority of pharmaceuticals valued at single-digit forward P/Es, Glaxo is trading at 12 times forward earnings. Glaxo appears even more overvalued when you compare it to a generic producer like Teva Pharmaceutical (Nasdaq: TEVA  ) , which has a huge generic-drug portfolio that has significantly less risk from the dreaded patent cliff. Mark my words, Glaxo's revenue drop-off will be steep when the generics begin their assault.

McDonald's (NYSE: MCD  )
I'm not purposely trying to attract the ire of Ronald McDonald, but McDonald's valuation has gotten completely out of hand. As I described during my "bashing" of McDonald's last week, there is a myriad of potential problems.

The European debt situation has all the makings of a euro killer, and with McDonald's deriving quite a benefit every quarter from currency translation gains, it could come as quite a shock to shareholders if the company misses by a mile due to a weakening euro.

Another problem is inflation. Food costs continue to rise beyond McDonald's own expectations and I would anticipate that unless the company increases prices and risks alienating some of its consumers, especially in Europe, its margins will contract.

Finally, there's the company's valuation, which is the primary cause for concern. Since 2002, its price-to-book has tripled and its price-to-cash flow has doubled. It's no longer the value it once was and I'd go so far as to say that at 16 times forward earnings, and with revenue growth expected to slow to 5% next year, Mickey D's is expensive. These golden arches may be made out of fool's gold in 2012.

Capital One Financial (NYSE: COF  )
If you think European banks are the biggest concern heading into 2012, you may have another think coming.

Capital One Financial derives more of its revenue from its credit card division than any other large U.S. bank. Based on its third-quarter report, almost 80% of its revenue was tied to net-interest income. This puts Capital One at a considerably greater risk of trouble if the U.S. economy were to dip back into recession. Although net charge-offs dropped during the quarter, delinquencies beyond 30 days rose.

The truly scary part is that the U.S. economy is giving off the initial warning signs that every Capital One shareholder should fear. Foreclosure rates are once again on the rise, housing prices are falling as some pundits are calling for a triple dip, and mortgage applications are drying up with even the slightest bounce in interest rates, despite lending rates at 60-year lows. If homeowners find themselves unable to meet their obligations, Capital One will be the first bank to feel the effects of delinquencies. Do yourself a favor and stick this stock back in the safe deposit box.

Baidu (Nasdaq: BIDU  )
Baidu may fit the bill as a Motley Fool Rule Breaker selection (and it has lived up to its billing), but rules aren't the only thing that Baidu is breaking. Baidu's valuation appears to be headed straight to the stratosphere with the company valued at 29 times forward earnings, 61 times cash flow, and a laughable 22 times book value.

Baidu has been able to maintain these nosebleed valuations for quite some time because of its dominance in China's search engine market, where it currently holds about 70% market share. The concern I have is with China's slowing growth. Although Baidu's guidance bucked my projections last week of a slowdown, I highly doubt this fast-growing Internet company will be able to keep up its torrid growth rate in light of Chinese government initiatives designed to slow growth and increasing competition from Sohu.com (Nasdaq: SOHU  ) .

China's GDP forecast has already been reduced by Goldman Sachs and Credit Suisse and I figure it's only a matter of time before the World Bank follows suit. Baidu's valuation is simply too rich for my blood and I suspect it could be in for a rough 2012.

Foolish roundup
With volatility as the new norm, you can't help but take a critical eye to your investments. While these companies may provide investors with the chance for long-term appreciation from their current levels, I'd be willing to bet my Motley Fool CAPS points against them in 2012.

I'm down on these five stocks, but for 11 stock ideas that may fare better, check out The Motley Fool's new free report "11 Rock-Solid Dividend Stocks," which features 11 stocks my fellow analysts believe are built for the long term.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and find him on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Altria Group and Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Sohu.com, McDonald's, GlaxoSmithKline, Teva Pharmaceutical, and Baidu. 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 Motley Fool has a disclosure policy.


Read/Post Comments (25) | Recommend This Article (66)

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 04, 2011, at 2:33 PM, steelheart100 wrote:

    People have been putting big MO down for decades now. Guess what, it just keeps making money and producing a great dividend. Just because it is not a growth story does not mean it isn't a solid investment. I think if you went back and looked at the headlines when the original danger labels, then enhanced danger labels came out you would see the same thing. In a funny way I think the labels don't do what they are meant to. Look at how many cars will go around a road closed sign, that doesn't mean much either. Get real, people will continue to smoke. The smoking rate many ease down slowly but MO is still an unbelievable money maker. I have to say that McDonald's wont hurt either. Maybe it will level off a bit, but in the end kids still love it and it's simply part of the fabric of America. A well run company which I'll agree is not a screaming buy right now.

  • Report this Comment On November 04, 2011, at 4:50 PM, Eerkes wrote:

    Mcd will catch up to it's pe. Company deserves a premium because every dollar of earnings is allocated to shareholders. So the return should be the earnings yield plus organic growth. I still like mcd. You may be right in predicting a single year of poor performance, but I'm not selling that is for sure, and would love to buy more lower if it comes to pass. Also own mo, but rather than sell outright, I sell calls right above the current price, works out well.

  • Report this Comment On November 04, 2011, at 5:01 PM, TheDumbMoney wrote:

    I own both MO and MCD, and I completely agree.

    I have owned MO for over twelve years. After the recent report, I actually entered some stop/limit sell orders if it goes below a certain amount. In a world where PM exists, and I have a large PM holding from my split pluss additions, MO makes less and less sense. It's like holding a junk bond purely for the higher yield. Not going to sell now, but my stop limits (well, well below today's price) will lock in a bunch of long-term gains if something truly existential happens.

    As for MCD, it is plainly overvalued. The long-term view remains in place, and since my cost-basis is $45/share and it's a super-long-term hold on the fundamentals, I see no reason to get too excited about the overvaluation. If a Euro implosion causes a stock implosion, it's probably an opportunity to add to that one. Otherwise, this is a more likely to pull a KO, where it grows into its valuation and the stock doesn't move for some years. Likely not a CAPS outperform from this point, unless we have a U.S. recession, in which case it will outperform the market.

  • Report this Comment On November 04, 2011, at 5:13 PM, Tsharp1947 wrote:

    PM vs. MO: PM has twice the growth for half the risk, end of story.

  • Report this Comment On November 04, 2011, at 6:29 PM, NickFL wrote:

    I own some PM because it has better growth and they increase dividends. I also wanted to accumulate MO but after recent report I sold it. However I don't believe placing larger warning label would deter people from smoking. Everybody who smokes I'm sure is aware of the risks. Also Altria can just raise prices and people will pay more. So if the dividend is safe then why would investors be selling the stock?

  • Report this Comment On November 04, 2011, at 7:15 PM, rd80 wrote:

    Good article Sean.

    "Another problem is inflation. Food costs continue to rise beyond McDonald's own expectations"

    MCD provided the counter-point to this in its latest earnings release. At-home food prices are climbing faster than MCD's cost of goods. That gives the company room to raise prices and maintain the relative valuation to eating at home.

    It is expensive compared to the broad market, but not compared to its peer group. I'm terrible at valuations, but I'd say MCD is in the high part of the 'fairly valued' range. Definitely not the bargain it was a few years ago.

    Long MCD. No plans to buy more anytime soon, no plans to sell either.

  • Report this Comment On November 04, 2011, at 7:44 PM, mansourg54 wrote:

    Such articles are misleading. If the above logic is accepted which Blue chip stock should we buy because the above analysis applies to most blue chip stocks. MO can grow its beer, its wine, its smockless tobacco, its cigar and its financial operations. Where is the growth in MSFT, INTC, IBM, JNJ,PG, RAI,LO,BTI etc etc etc.? PM growth is based on acquiring international tobacco companies but this cannot go for ever. PM is unable to enter the Chinese and Indian markets. A pack of cigarettes outside the EU is between $0.5 and $2.0. PM share price rises because of buyback programs. People smoke less because of the economy and not because of health concern. Death is coming regardless if you smoke or not. This is most smokers' arguement.

  • Report this Comment On November 04, 2011, at 8:27 PM, dave383 wrote:

    How many times has the Motley Fool said to buy Mcd and mo?

  • Report this Comment On November 04, 2011, at 9:14 PM, KyleSanDiego wrote:

    I think TMF should calibrate these e-mails somehow. Can anybody at tmf say anything and are all opinions from equally experienced people with similiar track records? This one was a complete waste of my time...sorry Sean...you need more back-up for your opinions. So just quantify things a bit for us. Lets take MCD....

    1) Currency translation....give us the historical numbers and associated stock price impact. Can you make a graph of currency translation vs stock price?

    2) Weaking of the Euro...how weak does it have to get for MCD to miss (miss what?) by what? 5,280 ft ? - and put that in financial terms please

    3) Food costs... how much inflation would eat into how much margin? You think these things, but if your members are going to make financial decisions, you have to quantify things...I would get laughed out of a customers board room if I spouted off like this without some sort of quantification.

    OK I know you are doing a one year case...don't buy at $93 and expect to make much in 12 months. You can make that case on many Blue Chips, and if you do, I would encourage you to back it up with some data.

    People buy MCD because it is safe and solid as a rock. People like burgers and fries and MCD can sell them at a lower price than anyone else; and all over the world. So when markets tank, why does MCD not tank? Seems like you picked a few things to criticize, but miss the big picture on MCD. I think you can do better Sean.

  • Report this Comment On November 05, 2011, at 9:38 AM, mmmm101 wrote:

    KyleSanDiego,

    You have to remember that these articles on MF's home page are here to get you to sign up for their fee based services. MF is infamous for their relentless pursuit of badgering people to pay up; it is a business, after all.

    They do get into the details in the for-fee services, and the exchange of info posted on the boards can be quite interesting and informative.

    I quit my service because MF simply didn't meet my needs. I am someone that needs a service that does more hand holding - simply no time to do enough due diligence. Now, MF claims they will guide enough, but there were too many companies that imploded and the advisers did a LeBron. I do see that people that have the time and interest might benefit from these services for no other reason than investment ideas and MF community exchanges.

    Beware: there were, during my time, a number of recommendations that blew up where Bill Mann disappeared only to surface when it was too late and finally "advise" to sell - down 90+ percent. He was fire from that service so hopefully the new folks are better. It's not that Mann is an idiot, certainly most anyone who invests has blow-ups now and again, it's how he handled (mishandled) the situation. Mann has an ego that just won't quit. Tom finally had to come in and basically apologize for the debacles and calm the masses. They must have lost a lot of customers. Anyway, my 2 cents.

    Good luck to all.

  • Report this Comment On November 05, 2011, at 12:16 PM, longertime01 wrote:

    Ha ha, it's easy to bash any company -- good or bad! Good luck my friend by shorting the companies the above.

  • Report this Comment On November 05, 2011, at 5:49 PM, Bruce87036 wrote:

    Don't I get an email from MF every week about how great MCD is? I got into MCD recently; it's up 5%, but I got it for the dividends.

    Go ahead and bet against it, but don't bet too much.

  • Report this Comment On November 05, 2011, at 6:40 PM, daveandrae wrote:

    I bought my first 500 shares of McDonald's in 2003. My cost basis back then was 13.40. Friday, the stock closed at a market price of 93.81.

    Obviously, after eight and half years, I know far more about this business than you do. The most important of which is not to ever sell it.

  • Report this Comment On November 05, 2011, at 7:53 PM, martinedeboodt wrote:

    I am kind of getting tired reading these radically opposing recommendations from TMF and starting to think giving up my subscription. It is not possible for me to put the right value on articles like this one. I want a service that speaks with one balanced voice. Apparently TMF has too many people who love to push their personal opinions so I might as well look somewhere else for advise.

  • Report this Comment On November 05, 2011, at 8:10 PM, BMFPitt wrote:

    I've made some good money betting against Radio Shack this past year. I don't see any way they will survive as a company, and the only thing I have to fear is an overpriced buyout offer.

  • Report this Comment On November 06, 2011, at 8:27 AM, CommonScents wrote:

    I personally like the opposing recommendations.....the first thing I do when I'm thinking about buying a stock is to get on google and find as many articles as possible that make the case AGAINST owning the stock.

  • Report this Comment On November 06, 2011, at 5:28 PM, dctodd27 wrote:

    Totally agree with the author on MCD. It is overvalued on a number of different metrics. Just because its been a great stock for 8 years doesn't mean it will be a great stock for the next 8. Much better opportunities out there...

  • Report this Comment On November 07, 2011, at 3:28 AM, TrackUltraLong wrote:

    To collectively answer those who've commented on my dislike for McDonald's, I'd refer you to the Bash My Stock article for a more thorough explanation as to why I'm not a big fan of the golden arches in 2012.

    http://www.fool.com/investing/general/2011/10/25/bash-my-sto...

    TMFUltraLong

  • Report this Comment On November 08, 2011, at 1:58 AM, ikkyu2 wrote:

    Not in agreement with your thesis about MO. They are protected from litigation since the Master Settlement and they have the best management team and the best widget-like product in the world.

    As a doc I regularly engage people in smoking cessation chats; as an MO shareholder I must admit that very few of these chats are successful, although insurers pay me for them. Not only that, but if you look at what Altria did in Scandinavia before the split, you can get a sneak preview of how PMUSA can prosper and continue to thrive in an increasingly smoke-free America: smokeless, snus, etc. They nearly cornered the Scandinavian tobacco market. No reason they can't do it here; they're a little more dominant every year.

    And, of course, there is recreational cannabis on the horizon. MO's ready to go on this one - they own California farmland and have trademarked the Marley name for use on cannabis cigarettes if it becomes legal.

    Full disc: long MO and PM and very bullish on each.

  • Report this Comment On November 08, 2011, at 11:37 AM, Pietrocco wrote:

    Gosh,

    Your ignorance about GSK is appalling.

    You cite Avandia`s imminent patent loss as a major negative.

    Have you actually read the sales column for that product??

    Sales are already almost zero, THERE ISN`T ANYTHING TO LOSE!

    Also, to state that" The patent cliff is a worry for all major pharmaceutical companies, but none more so than GlaxoSmithKline..."

    is very misleading, as over the mid-term GSK will lose a lower percentage of sales to generics that companies like BMS, Lilly and Astra.

    Please, before writing, check your facts.

  • Report this Comment On November 08, 2011, at 11:22 PM, flounderuiuc wrote:

    This has to be worst piece I've ever read in my years of financial reading...

  • Report this Comment On November 11, 2011, at 2:21 PM, WINESBYGEORGE wrote:

    Agree with many above - sold MO about a year ago and bouhgt PM primarily for their worldwide sales which have been growing . Plus the dividend is about the same. Even Jim Cramer says PM is a better bet.

    wines by george

  • Report this Comment On November 11, 2011, at 10:30 PM, D23RIA wrote:

    Is there anyone who thinks the premise of this article is the way to go about managing your money?

    My view is you are investing, trading or both.

    Investing involves at least a 3 year view of performance. Trading involves 3 hours or maybe 3 minutes.

    Benchmarking against 1 year of the S&P is irrelevant.

    The lost decade occurred if you bought everything in teh S&P on 1/1/2001.

    You did fairly well if you bought 1/1/2003, even with the gyrations of the last four years.

  • Report this Comment On November 13, 2011, at 6:37 PM, wpc1123 wrote:

    All the comments deal with profit/loss in USD. What happens to p/l when the USD is again devalued (QE3)? Why is there no consideration of the inherent value of 'precious' metals, i.e., Au, Ag, Pa, Pt, etc.?

    I've been convinced to put at least some of my 'stuff' there.

  • Report this Comment On December 16, 2011, at 1:00 PM, sept2749 wrote:

    Of course we get opposing opinions from TMF's writers - they are all unique individuals and have different opinions. We should be glad about this as it gives us greater perspective. I really dug your article and feel MO is good but PM is much better. MCD is great but overpriced at this time.

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