The market keeps shrugging off bad news and moving higher, as even the first full-percentage drop all year couldn't keep indexes from ending last week in positive territory. But the rising tide hasn't lifted all boats. Some stocks just can't seem to shake off their doldrums and take gains along with the rest. There may be some apparent values in the wreckage, but in many cases there are good reasons why these stocks are down in the dumps. If you keep your eyes peeled for the right signs, you can avoid these value traps and keep your investments in companies with brighter futures.
There are a lot of companies that have been on the receiving end of a pummeling, so it can be difficult to tell which are going to get counted out and which might be able to get up off the mat. For this search, I focused on stocks with poor performances this year matched with those with anemic expectations going forward. Remember, many analysts overestimate a company's potential, so single-digit growth predictions could just be a cloak to hide long-term floundering.
1-Year Price Change
Projected 5-Year Earnings Per Share Growth (Annualized)
|Research in Motion (Nasdaq: RIMM )||3.20||(78.3%)||6.2%||4.72|
|First Solar (Nasdaq: FSLR )||NM||(80.4%)||14.6%||6.44|
|OfficeMax (NYSE: OMX )||13.58||(60.9%)||2.4%||7.27|
Source: Finviz.com. NM = not meaningful due to negative earnings.
Not much motion left in RIM
Research in Motion has gone from smartphone superstar to also-ran in just a few short years. Like the obsolete Palm PDAs its Blackberries dethroned, RIM is (still-) living proof that you're only as good as your latest gadget in the mobile space. For a company with over 50% annual earnings-per-share growth over the past half-decade, going forward with single-digit expectations is an abysmal turn of events. Its market share has shriveled in the face of Apple's (Nasdaq: AAPL ) cool factor and Android's ubiquity.
While the company's co-CEOs stepped down earlier this year, new CEO Thorstein Heins has said he thinks "no drastic change is needed." But when you go from top dog to the doghouse this quickly, it takes more than rearranging deck chairs on your sinking ship to recover. RIM's market share sits at about 15%, and there's little indication that consumers want more BlackBerrys. Even RIM's fortress of enterprise solitude has come under siege, with at least one major oil-services company making the switch to iPhones. As Apple continues to pick up business market share, there seems to be no bright spot on the horizon here for RIM.
First Solar was once the most prominent example of solar's bright future, but now it looks more like a cautionary tale against counting your technology chickens before they hatch. Thin-film solar was once touted for its lower cost, but as costs drop across the board, First Solar has seen its advantage evaporate and has sunk into the red:
A broader supply glut has been hampering the entire solar sector, but that doesn't mean every panel maker will go under. As is always the case in high-tech endeavors, the companies with the best tech produced at the best price will weather the storms. Since First Solar was recently on the hook for faulty panels, it seems that a push for "low cost at any cost" has come back to haunt it.
First Solar is still among industry leaders in total capacity manufactured and could move into larger-scale installations. In all cases, future success will hinge on their ability to create high-quality panels with superior cost efficiencies. Having half of this recipe won't cut it, and failing panels are a huge red flag. I'm not the only Fool that's turned against First Solar -- Rising Star Alyce Lomax cashed in her solar chips earlier this month.
With expected earnings growth so low it can't even clear average inflation, and lacking any dividend, there's nothing to recommend OfficeMax over its larger competitor, Staples (Nasdaq: SPLS ) , which sports a 2.9% yield, a lower P/E, and a higher projected annual growth rate for the next five years. Let's not forget that estimates are often optimistic, and OfficeMax has already been on its way down for years:
Ask other second-tier specialty retailers how their market position worked out. Staples is over 20 times OfficeMax's size and has a popular online storefront. Few large-format retailers have done as poorly as OfficeMax in the last five years, as fellow Fool Robert Eberhard discovered late last year. There is a possibility that the two sub-Staples office-supply retailers might consolidate, but given the spate of retail bankruptcies in recent years, there's just as much chance that OfficeMax might one day just go off to that big-box warehouse in the sky.
Foolish final thoughts
I've given all three companies long-term underperform ratings in Motley Fool's CAPS, and only time will tell whether I've made the right call. If you think I'm wrong, let me know why you think these companies can get off the mat and live to fight another day. Looking for a better opportunity? The Motley Fool's put together a new report that explains our top stock for 2012, and what makes it such a great buy today. The report is free, so claim your copy now to get all the information you need to add a big winner to your portfolio today.