As investors, we often become fixated on looking for the good in companies. We try to find the next growth stock, a great value, or just a story we can believe in. But it can be just as profitable to look for companies that are overvalued so we can sell shares we may own, or short the stocks if they're way too hot.
I'm pointing to three stocks that I think are grossly overvalued and would be great candidates. I'm backing up these picks with CAPScalls on my Motley Fool CAPS page to make these picks transparent and so I can track my results.
Groupon (Nasdaq: GRPN )
Groupon's stock is trading at new lows, but I think this stock has much further to fall. As of last Friday, the company was still valued at more than $10 billion, and I'm having a hard time figuring out why.
After the stock came public, I pointed out that not only is Groupon trying to build a business on loss leaders, but members of its management team have also made substantial sales of their own stakes in the company. That's not exactly the kind of company you want to be invested in for the long term.
But the concern lately has come from a sense that Groupon knows it has competitors breathing down its neck and is doing everything it can to keep them at bay. LivingSocial, backed by Amazon.com (Nasdaq: AMZN ) , has built a large presence in the space, and a slew of other companies is coming in as well. But handing out free money to try Groupon Now! and the addition of Grouponicus shows that Groupon is trying to get into anything it can, no matter the cost.
LDK Solar (NYSE: LDK )
There is a lot of uncertainty in the solar market, but I am very confident that the industry is headed for consolidation and more bankruptcies before the industry is set for consistent growth. Some companies will be bought out, but others are headed toward closing up shop.
LDK Solar is in the latter category, because the company doesn't offer anything to a potential acquirer that would be worth taking on the company's debt. LDK was built as a supplier in the solar industry and tried to vertically integrate into making modules, but when the market turned south, buyers spent money on better-known products from Trina Solar (NYSE: TSL ) and Yingli Green Energy (NYSE: YGE ) . That left LDK to focus on supplying cells, wafers, and polysilicon to other manufacturers, essentially fighting for scraps.
Being a supplier would be fine if the industry was growing, but there is far too much polysilicon on the market. In addition, module manufacturers are increasingly vertically integrating their businesses, forcing suppliers out. That combination has sent the price of polysilicon to new depths and is putting LDK in a tough spot.
To top it off, LDK is sitting on $2.35 billion of short-term debt, $1.26 billion in long-term debt, and reported big losses for the second and third quarters, and it's building more polysilicon supply. Talk about making all the wrong moves. That makes LDK Solar a top short candidate for me right now.
Research In Motion (Nasdaq: RIMM )
There's really no coming back from where Research In Motion is right now. After taking over the smartphone market with a product so addictive consumers called it the CrackBerry, the company has fallen behind goliaths Apple (Nasdaq: AAPL ) and Google in the smartphone war. Unless these two innovative companies take steps backward with their operating systems, RIM is just too far behind to catch up.
Even with the stock trading near 52-week lows, I think there's further to fall. Sales have tumbled over the past year despite the fact that smartphones are being sold in larger and larger numbers. And with Apple in particular adding features to allow enterprise customers to get the iPhone, why would business customers take a step backward with RIM's products?
RIM does have a debt-free balance sheet, but margins and sales are falling fast sequentially in recent quarters, so the company is going to have to turn around a sinking ship quickly.
Before long, I think RIM will be forced to look for a buyer or begin squeezing as much cash as it can from a dying business. Either way. I think this is a perfect short candidate, maybe with a long trade in Apple.
Tracking my picks
Do you agree with these short calls? Tell me what you think about them in our comments section below.
And you can always check out this and my other CAPScalls at my CAPS page. Be sure to start your own CAPS page to see whether you can beat the market.