It's time for round two of "5 Companies You Love That I'm Betting Against"! If you recall, I took a very unpopular stance on five well-known and mostly loved companies in the fourth quarter last year and went out on a limb by predicting that they would underperform in 2012. As you can see below, the results were mixed, but I feel vindicated in proclaiming that this basket of stocks underperformed the S&P 500 by an average of 6.1% over the allotted time frame.
Performance Since Prediction
Performance Relative to S&P 500
|Capital One Financial||26.8%||11.4%|
Source: Yahoo! Finance. Results from Nov. 4, 2011, through close Oct. 2, 2012. N/A = not applicable.
As we dive into the fourth quarter, it's time for me to once again step into the contrarian role, take my gloves off, and challenge five well-known and widely loved companies to a battle against the S&P 500. Like last time, I will measure my success against the performance of the S&P 500.
Without further ado, here are five companies you love that I'm betting against in 2013.
Let's start by making a statement and betting against some 15,300-plus CAPS members.
Google, by all counts, has clicked on all cylinders in 2012 by strengthening its Droid operating system market share, expanding its lead in online and mobile marketing, and maintaining its dominance as the premier search engine. So why would I bet against Google?
How about the fact that Google has yet to fully prove itself in the mobile ad market? With regard to PCs, Google is the king of advertising, but the mobile market is a work in progress with no genuinely accepted ad platform dominating the sector. That means a small-fry like Velti or Millennial Media could very easily grab market share from Google. Also, what about the effect that Apple's new iPhone 5 with 4G LTE capability will have on Droid-based LTE phones? Although it's unlikely the Droid OS will lose its supremacy in the smartphone arena, it appears very likely that Google will be ceding market share to Apple for at least the next two quarters. Finally, what of its Motorola Mobility purchase for $12.5 billion? Was that really just for the patents? Until this purchase is explained better, I'm placing a firm bet on Google's underperformance in 2013.
By a count of 428 to 48, the outperform calls resoundingly expect paint-and-coating specialist Sherwin-Williams to continue to head higher. But I'd like to take Sherwin-Williams up on the offer in their commercials and ask them a few questions!
To begin with, how do you explain a valuation of 20 times forward earnings when the housing sector is selling homes at an annual rate of 373,000, which is still well below both the historical average and the all-time high of 1.4 million set in 2005? In fact, according to data from Morningstar, Sherwin-Williams' P/E and cash flow are both double where they were when the housing market was at its peak! Also, Sherwin-Williams, how are you going to counter rapidly rising titanium dioxide prices? Titanium dioxide pigments are used as whitening agents in most paints and coatings, and the largest producer of the pigment, Tronox, recently cut back production and noted that it expects pricing of the pigment to rise 15% this year. Go ahead, folks, and ask Sherwin-Williams if they know the answer to those two questions!
Amgen is rapidly approaching 2,000 outperform CAPScalls, but that's not going to be enough to keep biotech's sweetheart off my naughty list in 2013.
Late last year Amgen announced a $5 billion Dutch auction that resulted in the company repurchasing 83.3 million shares. With fewer shares outstanding to compare its profits against, its EPS figures have adjusted higher and Amgen appears considerably cheaper on a forward basis than it once did. This smoke-and-mirrors show isn't fooling me, though.
Amgen's second-quarter report highlighted an 8% uptick in organic sales over the previous year; however, it also pointed to some alarming trends. For instance, the majority of the gain in sales came from price increases and not volume growth. Aranesp and EpoGen both saw a decrease in demand while even Neulasta and Neupogen saw inventory issues curbing demand. Amgen also has little in the way of developed pipeline growth. Aside from Xgeva and Prolia, which still make up a tiny portion of total sales, Amgen is funding its growth through purchases, including Micromet and KAI Pharmaceuticals. Without real product growth sans price increases, I don't foresee how Amgen heads higher in 2013.
That's right folks, I'm stepping on your bread bowl!
Panera has a lot of factors working in its favor, including being a niche provider of healthier food options, offering reasonable value at its casual dining locations, and consistently beating Wall Street's earnings projections. However, that is a trend that I predict will come to a grinding halt in 2013.
The biggest deterrents for Panera are falling consumer spending, weak customer traffic, and rising food costs. In Panera's second-quarter results, it noted that pricing action accounted for 40% of all net-bakery same-store sales growth. Product mix added most of the remaining boost, with transaction growth adding a mere 0.9%. What this tells me is that new customer traffic remains weak and Panera is merely passing along price hikes to existing customers. At some point, higher prices are either going to chase these consumers to other eateries or Panera is going to need to hold its pricing firm and eat into its own margins as food prices rise. Panera hasn't missed Wall Street's EPS estimates in nearly five years, so this call is a gamble, but I don't predict the restaurant sector is in for a banner year in 2013 as a whole.
So I'm stubborn -- tell me something I don't know!
This five-star CAPS stock continues to defy gravity in spite of an increasing amount of regulations building against it and a number of other tobacco companies in the U.S. Both the FDA and Centers for Disease Control and Prevention are waging war on tobacco companies through multimedia advertising and product disclosure campaigns. Both agencies aim to make it as difficult as possible for Altria and U.S. tobacco producers to sell their products within the United States and recruit new smokers.
Altria is especially vulnerable since the majority of its margin has been derived from its premium Marlboro brand. New smokers in today's society are tending to gravitate to lower-margin discount brands more because of declining spending and weak wage growth than anything else. That spells bad news for Altria, which is already cutting its workforce by 15% in response to weakening sales patterns. With Philip Morris International boosting its dividend and having far less legal exposure than Altria, I can't see why investors wouldn't make the trade-off and dump Altria in 2013 in favor of Philip Morris.
Neither of these five companies strikes me as a particularly good value currently -- despite the love they are shown on CAPS -- and I'd be willing to bet my CAPS points that all five will greatly underperform the S&P 500 in 2013. Now it's time to take a step back and let the market work its valuation magic.
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