Valeant Pharmaceuticals ( BHC 3.49% ), Twitter ( TWTR -0.02% ), and BofI Holding ( AX -0.10% ) each have unique challenges that make three of our Motley Fool contributors think it's best to sit on the sidelines right now. Read on to learn what obstacles these companies need to overcome before investors consider them for portfolios.
Taking on water
Todd Campbell (Valeant Pharmaceuticals): It seems like forever ago that Valeant's acquisition-hungry strategy made it a market darling. But following revelations in 2015 that its strategy included price increases of several hundred percent, the company's shares have been in free fall.
Scrutiny over pricing forced Valeant to shutter its distribution partner and sack its longtime CEO, and a steep slide in sales has raised questions over its long-term solvency. To get back on track, the company has inked a new distribution deal with Walgreens and hired a seasoned veteran to run the company. It's also refinancing a mountain of debt that's been zapping its cash flow.
The new leadership is working to keep the boat afloat, but there's little evidence (so far) that the Walgreens deal is panning out or that sales and losses are stabilizing. News that longtime advocate and major shareholder Bill Ackman sold his stake in March adds to the uncertainty.
This company has lost its luster, and until Valeant's management proves that it has plugged the leaks, I'm unwilling to step up and climb on board.
Avoiding this social-media company
Keith Noonan (Twitter): Since it has somewhere in the neighborhood of 320 million monthly active users and is a go-to source for breaking news, it's not hard to make the case that Twitter is a compelling service -- I count myself as a fan of the social-media site. At the same time, I wouldn't touch the company's stock.
Twitter's user-base growth has slowed dramatically, and it's still not clear what changes can be implemented to make the business profitable over the long term. The company seems to be angling to secure more media content, but last year's streams of NFL games didn't do much for user growth or profitability, and the proposed plan to introduce a premium subscription version of the company's TweetDeck management suite, targeted at power users and content creators, doesn't strike me as a sufficient solution. Even if every one of the company's almost 200,000 verified accounts subscribed to the service at $20 per month, at $240 per year, that would only generate revenue equivalent to roughly a tenth of the $457 million loss it posted in 2016.
At the core, Twitter has a content problem. The platform is less personal than social-media rivals including Facebook's core product and its Instagram offshoot, and Snap Inc.'s Snapchat. This results in lower engagement and less valuable data. Also, much of the site's core appeal depends on fiery exchanges that many advertisers are hesitant to be associated with. Add in ongoing issues with bots and low-quality posts, and I think Twitter's still too risky.
A bank that keeps rising, so what's not to like?
Brian Stoffel: About nine months ago, I singled out BofI Holdings -- parent company of the Bank of the Internet -- as a stock that could potentially double. So far, that's been pretty prophetic, as the stock is up markedly since August 2016:
But I've also long been wary of the bank and its management, and the run-up in the stock's price makes me even less likely to consider it.
By all traditional metrics, BofI not only looks to be a fantastically well-operated bank, but seems to be underpriced to boot. By focusing on a completely branchless model to eliminate overhead, and offering loans to nontraditional borrowers, the company has reached record levels of returns on assets and equity, and has posted staggering growth in deposits. But it trades for just 14 times earnings, and has a PEG ratio (price/earnings to growth) of 1.4 -- pretty low for today's market.
The problem is that I'm not sure how reliable all of those numbers are. They could be pristine, but banking is an industry rife with hidden risks -- and banks are famous for being black boxes for everyday investors like you and me.
Starting with a lawsuit filed by a former employee in October 2015, short-sellers have hit BofI hard. That was followed by an April 2016 report that up to nine former employees were also providing testimony about nefarious dealings at BofI.
So far, there's been no solid evidence of wrongdoing, and the court dates for both of these suits are still months away. However -- and especially after the stock's run-up -- any negative news could send shares reeling. That may never happen, but there exists a level of risk that I'm simply not comfortable with, so I won't be going anywhere near the stock.