Stocks rise and fall for many reasons, which makes predicting swings in the stock market tremendously challenging, if not impossible. Savvy investors often beat the market not only by picking winning stocks, but also by avoiding value traps or stocks that are cheap for a reason. Below, three Motley Fool contributors explain why investors should avoid RealD (UNKNOWN:RLD.DL), Zynga (NASDAQ:ZNGA), and Sears Holdings (OTC:SHLDQ) at all costs.
Tim Beyers (RealD): Billion-dollar blockbusters are now an annual occurrence at the cineplex. In 2014, Transformers: Age of Extinction reached that coveted plateau by earning $1.09 billion worldwide. Avengers: Age of Ultron planned for a May release looks to do the same.
Premium showings such as the 3D screenings enabled by RealD always make up a portion of the gate for films like these. How big a portion depends on the movie, but it's probably not as much as you think. According to The-Numbers.com, patrons spent $10.37 billion on 1.27 million movie tickets last year -- or $8.17 on average per stub. That's a 32% increase over what moviegoers were paying a decade ago. Some of that is no doubt due to 3D and extrawide screen showings, but at 3% annual growth, it's also possible that everyday inflation accounts for the bulk of the gain.
RealD's recent results argue in favor of the latter. Revenue growth stalled at $246.6 million in 2012 after rising six-fold in the three years prior, RealD has produced just $176.2 million over the trailing 12 months and recently hired banker Moelis & Company LLC to pursue strategic alternatives, including a possible sale of the company. Over the past 52 weeks, RealD's stock price has ranged from $13.53 to $8.97, according to S&P Capital IQ data.
Don't expect a premium if RealD finds a buyer. For all its technology and intellectual property, no acquirer is going to overpay for a platform that moviegoers themselves won't pay up to enjoy.
Tamara Walsh (Zynga): I'm not too proud to admit that Zynga is one of my worst stock picks of all time -- having lost as much as 77% of its value since I bought it three years ago. Even at the first signs that Zynga's fundamentals were beginning to crumble, I decided to hang on believing that a turnaround was imminent. However, with the social game maker now trading around $2.33 per share, or a heartbreaking 60% below the stock's 52-week high, I'm finally ready to cut my losses and move on.
For investors hoping to scoop up Zynga near all-time lows and ride out a turnaround, think again. Not only is Zynga faced with declining net income and weak operating cash flow, but also key engagement metrics such as monthly and daily active users continue to plummet year-over-year. Adding insult to injury, the company announced last month that it would shut down its Beijing game development studio in yet another move to cut costs .
Zynga lost more than $45 million in the fourth quarter alone, significantly worse than the company's loss of $25 million a year previous. Perhaps more worrisome is the fact that the number of people playing Zynga's games also declined during the quarter. Zynga said daily active users slipped 8% to 25 million, while monthly active users fell to 108 million, down from 112 million in the year-ago period. These results are particularly concerning considering competition in the casual gaming market is only getting tougher with big hits from rivals like King Digital.
At this point, there is little evidence suggesting Zynga can stop the bleeding and turn things around. For that reason, investors should steer clear of this stock as it struggles to stay relevant in the year ahead.
Bob Ciura (SHLD) The one stock in the consumer goods arena that I would avoid is Sears Holdings Corporation. The reason for this is quite simple: Sears is in a downward spiral, without a bottom in sight. Sales are falling, profits are collapsing, and it seems the best option management has come up with to engineer a turnaround is to close a huge number of stores. While this may stem the huge decline in earnings, closing stores will negatively impact Sears' chances of ever returning to growth.
In Sears' most recent quarter, the company lost $548 million. This was due partly to a 13% decline in sales, as well as from the effects of its store closures. Through the third fiscal quarter of 2014, Sears had closed, or announced for closure, 235 stores, the majority of which were Kmart stores. The company has more than 1,700 Sears and Kmart stores. In addition, Sears spun off Lands' End last year, and deconsolidated Sears Canada. Sears points to its online success as reason for optimism, but even though online and multichannel sales grew approximately 9% in the third quarter, it doesn't come close to making up for the weakness in Sears' brick-and-mortar stores.
Even excluding the lost contribution from all the assets Sears unloaded, the company is deteriorating. Sales declined even after stripping out the effects of the store closures, the Canada move, and the Lands' End spinoff. Sears' plan to become smaller and more streamlined, with greater efficiency, isn't working. The company has more liquidity now, having raised $2.2 billion through its various initiatives, but its core business is crumbling.
With so many other highly profitable companies out there with strong brands, stable earnings, and attractive dividends, there's simply no need to gamble on Sears' uncertain future.