Can you throw away the same stock twice?
Every week, I single out a stock that has no place being in your portfolio. I'll give you my reasons, but I'm no party pooper. I come right back with three stocks that I believe will generate better returns than the stock I'm throwing away.
This week, I'm going with a stock I recommended that investors dump last summer. It has gone on to shed 40% of its value. After a horrendous quarterly report this week, I don't think it'll bounce back with the rest of the market.
Who gets tossed out this week? Come on down, Garmin
You're going the wrong way!
If three rights make a left, what do three wrongs make?
Garmin has been a market laggard, and with good reason. Demand for its GPS products has waned as a result of:
- Sluggish new car sales.
- The convergence of gadgets, as more devices have some form of GPS functionality.
- Free apps on smartphones that provide street-level navigation and recommendations.
You don't have to take it from me. The company's first-quarter report says it all:
- Revenue fell by 34%. Earnings took a bigger hit, off 67% when you include more carnage from foreign exchange losses.
- Auto sales remain the major drag, but the segment still makes up 59% of the company's total business (versus 68% a year ago).
- Garmin actually claims to have gained market share in portable navigation devices (up to 37% globally and better than 50% in North America). It is faring well in some areas like outdoor fitness, but one has to assume that the company doesn't consider the proliferation of Web-enabled smartphones to be part of that market. That's ridiculous.
- And while Garmin is cash-rich -- with $1.2 billion in cash and marketable securities -- it's not very good with that money. The company spent $672 million to repurchase 17.1 million shares last year. In other words, it spent nearly $40 a share on what seemed to be timely bargain buys during 2008. Your heart has to go out to investors who bought in at the time, figuring that the company had to know the future would get brighter. Now that shares have fallen 45% below what Garmin paid for buybacks, those investors know better.
Even when car sales do come back, they are unlikely to be as GPS-dependent as Garmin would like. Wider availability of smartphone apps and in-dash Wi-Fi routers will turn more drivers toward free alternatives.
Even before this week's fiasco of a quarter, analysts figured that revenue and earnings would fall this year and in 2010. Garmin can still plunge another 80% before it approaches its cash mattress, giving investors little incentive to wait for potential growth catalysts like the perpetually bumped Nuviphone (which is once again being pushed to the next half of the year) or for a turnaround in 2011 to materialize.
You've seen the future, and there isn't a whole lot of Garmin going on.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.
It's no coincidence that when Apple
Sirius XM Radio
This pick is going to turn heads, especially when you contrast Garmin's cash-rich balance sheet to Sirius XM's debt-saddled quandary. However, between two gadget makers that live or die by automaker installations, at least Sirius XM is growing. It's a lottery ticket, I know. Then again, it's probably a better lottery ticket than parking your money in a company where the declines should continue for several more quarters (at least).
Research In Motion
In last summer's bash piece, my three recommended replacements were Apple, Nokia
I now think I was wrong to leave out the leading smartphone company. RIM's BlackBerry remains the industry's top dog. Sure, you can spend $100 and download Garmin for your BlackBerry, but that's like paying a king's ransom for a set of encyclopedias when you've got Wikipedia free and at your fingertips. Revenue at RIM grew by a mindboggling 84% this past quarter. If you can't appreciate that, then you may need more than a GPS to find a clue.
Other headlines from the weekly trash heap:
Do you like my substitutions? Would you rather stick it out with the tossed company? Are there other stocks I should look at in future editions of this column? Let me have it in the comment box below.
Garmin is a Motley Fool Global Gains selection. Google is a Motley Fool Rule Breakers pick. Apple and Best Buy are Motley Fool Stock Advisor recommendations. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days
Longtime Fool contributor Rick Munarriz bought a Nuvi three years ago and hasn't used it much over the past two years. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.