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 (DDD +2.52%) 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 (SSYS +0.83%) 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 (GOOG +1.28%). 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 (KORS +0.00%), 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 (PVH 0.84%) 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.
