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Analysts Look Back: The Toughest Calls of 2012

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Over the past year, three Foolish analysts -- Travis Hoium, Alex Planes, and Sean Williams -- have come together to decide whether certain stocks were worth your money, or if you'd be better off staying away. We've been debating the merits of individual stocks all year, and after 21 up-or-down picks, we're beating the S&P 500 by nearly 200 points. Some of our decisions have been easier than others, and we want you to know that we sometimes have the same difficulty settling on a stock as you. Today we'd like to share the thought processes that went into making our toughest calls of 2012, to give you a better understanding of how we arrived at our decisions, and what we had to go through to get there.

Alex's hardest call
This has to be 3D Systems (NYSE: DDD  ) for me, because after so much time investigating and writing about the fantastic possibilities of 3-D printing, I had to face the fact that this was one seriously bubblicious stock. There remains a big risk to our portfolio that investors will continue to bid up 3D Systems' stock well in advance of any fundamental improvements, because that's what often happens when investors latch onto the next big transformative technology without fully considering the business conditions behind it.

My biggest issue with going negative on 3D Systems was that I've been strongly bullish on both its prospects and on Stratasys (NASDAQ: SSYS  ) all year. Watching it rise so far ahead of its fundamentals throughout 2012 was an incredible ride, but the more I saw breathless news reports promising that the technology would bring the biggest change of our lives, the more I thought the market was getting in over its head. Investors didn't really understand the economics or the technology behind the Internet while the dot-com bubble inflated, but collusion between the media and market analysts contributed to years of "irrational exuberance" that lifted a number of worthless issues to extreme valuations.

I must say that I emphatically disagree with the notion that 3D Systems is either worthless or at a truly dot-com-era "extreme" valuation. However, both 3D Systems and Stratasys have risen far in advance of net income, cash flow, or future growth projections. I want 3-D printing to succeed, but I worry that this is the first wave of stocks that will eventually be left in the dust by better competitors as the technology matures. There's just so much that's unknown. I had to decide, and I decided that 3D Systems was overvalued.

Travis' hardest call
The hardest call for me was an outperform call on Google (NASDAQ: GOOGL  ) . I've never liked companies that can be replaced by a smart kid with an idea in a dorm room, because the history for these companies is poor to say the least. I don't see Google's competitive advantage enduring, and there are too many stories of formerly dominant Internet companies that virtually disappeared, or at least lost their edge, like Yahoo! (NASDAQ: YHOO  ) , Prodigy, and MySpace, to name a few.

My other problem with Google is that I don't see Google turning ideas into profits. For all that we hear about Google's phenomenal innovation, I see very little becoming a profit-generating machine. Google has made maps, mail, and online video easier to use, but much of this technology was purchased and the company still has very few ways to generate revenue outside of adding to search.

The one innovation that has caught on like wildfire is Android. But again, the company gives Android away for almost nothing, and it has virtually the same revenue possibilities if people use Android or iOS devices. For me, my outperform call came down to search dominance with the hope that one of its lab ideas sticks and becomes a big revenue generator. It was a hard call being the tiebreaker between Alex and Sean, and I'm still a little worried that competition from a smart kid in a dorm room could make Google nothing more than a memory.

Sean's hardest call
It's been difficult being the lone dissenter on Michael Kors (NYSE: KORS  ) , especially with the brand-name retailer taking Europe by storm and pumping up same-store sales globally by 30%-plus each quarter since it went public. Yet having spent a decade in the retail industry myself, I understand that growth like this is almost always as short-lived as fashion trends are in the retail world.

Even with consumer spending holding up well for brand-name products, I can't see Michael Kors being able to grow at this pace beyond the first half of 2013. It will need to contend with input costs that have a nasty habit of rising at the worst times, as well as a European economy that's cutting spending everywhere you look.

Competition among brand-name retailers is also increasing, with PVH (NYSE: PVH  ) amassing an equally impressive portfolio of brands (Calvin Klein, Tommy Hilfiger, Izod, and Van Heusen), all while trading at just a fraction of the forward P/E of Michael Kors. As I said, Michael Kors' growth at the moment is difficult to ignore and even tougher to bet against, but this growth rate simply doesn't appear sustainable.

Foolish final thoughts
Of these three debates, only 3D Systems was unanimously decided. As you can see, even when we agree, we can always find a way to approach those agreements with a unique perspective -- and a lot of the time, these perspectives can drag us away from our comfort zones. The three of us look forward to debating many more stocks next year, and we hope you'll follow along. We're always interested in finding out what our readers think, so feel free to leave us a comment below. If you'd like to follow our selections, you can watch our TMFYoungGuns CAPS portfolio.

Is 3D Systems really as difficult a call as Alex thinks it is? Many investors have profited greatly over the past year, but there are so many factors at play in the 3-D printing industry that could impair 3D Systems' long-term stock growth. Don't agonize over your decision -- educate yourself with our exclusive premium research reports. There's a wealth of information on this fast-moving company's future, including both opportunities and threats. If you're a shareholder, or are thinking of becoming one, subscribe to our 3D Systems research service today for the information you need.

Read/Post Comments (9) | Recommend This Article (3)

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 December 22, 2012, at 11:43 PM, dion2727 wrote:

    or momentum types who may view it your way. I choose to be an investor.The question I have are you speaking to traders and momentum players or investors?

  • Report this Comment On December 22, 2012, at 11:45 PM, dion2727 wrote:

    Why was my early discussion cut out?

  • Report this Comment On December 24, 2012, at 4:22 PM, Hummm wrote:

    I just joined this service last week and there was a report about "3 Stocks To Own For The New Industrial Revolution" with the reports I received when I sign up. Now this artice on 2 of them being overvalued? As a newbe I am just looking for a liitle feed back if this is normal for the service I just purchased?

  • Report this Comment On December 24, 2012, at 8:14 PM, Hummm wrote:

    And now I see I can get the whole story on DDD for another $15 bucks. Thought that was what the orginal membership that I paid for was doing. I am trying not to be negative but it is looking like I was sucked into a sales game. Any input would be appreciated.

  • Report this Comment On December 24, 2012, at 9:22 PM, XMFBiggles wrote:

    @ Hummm -

    I do not have any affiliation with the Fool newsletter services, and my opinions may differ from theirs. You're likely to find both bullish and bearish analysis on any stock you think might be worth an investment, including from different writers on the same site or possibly even from the same writer over time. I was personally very bullish on 3D Systems for over a year, until about September or October.

    Ultimately, the decision to invest or not is yours. Part of that decision will lie in determining which of the analyses you find are just noise, and which offer valuable, actionable insights. My opinions are offered only because I am convinced that they are correct, not because I am trying to confuse anyone. I appreciate the Fool allowing me the leeway to disagree.

    - Alex

  • Report this Comment On December 24, 2012, at 10:36 PM, Hummm wrote:

    I understand the different views. My biggest problem was getting the membership and then beng asked to buy another product that I thought I had coverage on and then the year end views article I read. I watched the site for a long time before I committed the money. Was just surprised by the way it seems to be playing out. Guess I expected that opinion up front from what I had seen from the site before I signed up. Guess I will see.

  • Report this Comment On December 25, 2012, at 10:20 AM, XMFBiggles wrote:

    @ Hummm -

    The premium research reports have always been directed towards readers who have not yet subscribed to one of our newsletters. If you're already a subscriber to Stock Advisor, then you should have access to even more information on DDD than is presented in the premium report, through a combination of recommendation histories, status updates, and forum discussion.

    You did get the official Stock Advisor opinion on DDD when you signed up -- recommendations are fully documented and the Fool's ownership stakes and recommendations are disclosed in every article published to the public site. As far as I can tell, they have not changed their opinions. You can examine the history of my public views on DDD, if you really think I've adopted a contrary position just to sell stuff, by doing a Google search with this string, if you want (delete the brackets): [ "Alex Planes" "3D Systems" ].

    Hope that cleared things up.

    - Alex

  • Report this Comment On December 25, 2012, at 2:39 PM, Hummm wrote:

    Looks like it is me not being familiar with how to navigate the site yet. The fact that "you" actually responded is comforting. Thanks

  • Report this Comment On December 26, 2012, at 4:57 PM, WineHouse wrote:

    Here's my take on why it's complicated.

    DDD and SSYS are "hot" stocks in a "hot" industry/technology that is nowhere near mature -- there are competitors out there developing different kinds of systems to do the same kinds of things, including many that are not public, and further development of the technology is ongoing at a furious pace. At the same time, there are products available, at all levels of size, complexity and cost, and they are being purchased by all sorts of customers, from airplane and automobile manufacturers, to almost-normal people who just want to play with a new toy that makes more toys at the press of a button, to Jay Leno. There's even a store that opened recently in New York City that sells small simplistic versions of 3-D printers that let you make little toys and stuff (I assume they also sell the "consumable" goop that the machines use to make the toys). So it's a hard call indeed. I think the technology is indeed one of the next big things. The question is when -- how many years from now? -- does it become a mature profit maker for the companies, and at that point, which companies will have "survived" to maturity, and will the share prices of those companies be above or below the current price (assuming that those companies are currently in existence and shares are available to the public, both of which are not necessarily the case)?

    I'm long on both but my stakes in both are miniscule. I'm not expecting to get filthy rich from those investments (hoping is not the same as expecting), nor have I risked so much money that abject failure would put me in the poorhouse.

    My "bread and butter" investments are boringly sane things like Dividend Aristocrats and similar companies. I'm basically risk-averse but have enough saved up so I can play around with a few risky investment ideas every now and then.

    Thoughtful, well-informed perspective and balanced portfolios, where high risk is taken only with the understanding that those dollars might disappear forever, make for the best road to a comfortable retirement. Risking large portions of your portfolio on "hot" ideas is foolish indeed.

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