Andrew Redleaf: 3 ‘Never Never’ Stocks

Source: Grant’s

There are just some stocks that investors should “never, never” own. That’s because certain companies will never make profitability its top priority or it will never willingly deliver a penny to investors.
Labeled a “libertarian math savant” by Bloomberg, Andrew Redleaf has crunched the numbers and found a basket of 18 stocks that investors should never own. He’s short these stocks and labeled this group “never, nevers.”
Founded in 2000 by Redleaf, Whitebox Advisors runs a suite of hedge funds with the philosophy that market strategies should be relatively simple.
If you’ll remember, back in May, billionaire David Einhorn came out and said he was short a basket of technology stocks based on their valuations. He noted that these stocks could well be a ‘bubble.’ His bubble stocks remind me a lot of Redleaf’s never nevers.
What’s a never, never?
Whitebox’s criteria include stocks with a market cap of at least $1 billion, annual revenue growth of 10%, operating expenses that are growing faster than revenues, and that the company isn’t buying back shares or paying down debt.
Here are the 3 stocks to never, never own:

1. LinkedIn (NASDAQ: LNKD)

The biggest headwind for LinkedIn has been slowing growth. Full year guidance shows revenues growing at only 36% this year. Growth is decelerating and its profit margin is negative or the trailing twelve months. Last year, revenues grew by 57%, and the year before it was 86%.
LinkedIn is still having problems convincing corporations to pay for talent services. Sure it’s the leader in the professional social networking space, but it the issue is that it wouldn’t be all that hard for the likes of Facebook (NYSE: FB) to move into this market. It would be a natural progression for Facebook and relatively easy to implement. Not to mention the fact that Facebook has a user base that’s at least three times the size of LinkedIn’s.

2. Workday (NYSE: WDAY)

Workday is in the “hot” cloud-based applications space. Yet, it’s not expected to earn any profits this year or next. Shares are still up 78% since their 2012 IPO. However, every year since its IPO, the company’s net loss has increased. Over the trailing twelve months, the company lost nearly $200 million.
The other issue is that Workday is competing with a couple industry giants. Workday’s market cap is a mere $15 billion. Meanwhile, SAP and Oracle could easily use their global reach and strong customer base to take market share from Workday. SAP’s market cap is $95 billion and Oracle’s is $180 billion. What’s more is that Workday trades at nearly 30 times sales. SAP and Oracle only trade at P/S ratios of 4.2 and 4.8, respectively.

3. (NYSE: CRM)

Salesforce trades at a P/E of 81 based on next year’s earnings estimates. Prior to 2012, had a positive profit margin, but since then the company has been losing money. Having lost as much as $260 million over the last twelve months.
Sales were up 38% during the first quarter of this year. Impressive, but still below the industry. Top competitor, Amazon, grew its cloud-based business by 60% year over year during the same quarter. About 30% of Amazon’s business is from its cloud business. What’s more is that Salesforce trades at 8 times sales, while Amazon only trade at 2 times.

One Never Never To Own

But if there were one ‘never, never’ stock to own it would be Facebook.
Facebook made Redleaf’s list of never, nevers, but it’s important for investors to know that this company is not the next MySpace. Facebook has 1.2 billion users. At its peak, MySpace only had 75 million users.
Unlike the three never, never stocks listed above, Facebook actually has a positive net profit margin. It has also underperformed the other three stocks over the last month.
Its P/E ratio based on next year’s earnings estimates is still high, but below the others. Facebook’s forward P/E ratio is 35. Of the stocks listed, Wall Street expects Facebook to grow earnings at the fastest annualized rate over the next five years.
The company carries no debt and has enough cash on its balance sheet to cover 7.5% of its market cap. Facebook is just figuring out mobile ad revenue and it has a stronghold on the social network market. There’s also other key monetization opportunities for the company, which includes Instagram, WhatsApp, Oculus and video.
Shorting stocks isn’t for everyone, but in the least, investors should make avoiding stocks that are highly speculative a part of their investment strategy. The 3 stocks to never never own are just a few of those names. Yet, certain stocks that look overvalued could be solid investments given their robust growth and market share position. Facebook is one such company.


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