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Great Company, Bad Stock

Written by Briton Ryle
Posted January 13, 2020

People figure that if they see a company doing great, it follows that the company's stock is doing pretty well, too. Makes sense; if a company is selling more/better products than its competition, then it's probably taking in a good amount of loot and counting a strong percentage of that loot as profits. 

People like to work for the best and be part of the best team. So, salary and benefits being equal, the best companies may also have the best pipeline of talented and motivated employees — a virtuous cycle for sure.

I was talking with my friend and colleague Jason Stutman about Tesla (NASDAQ: TSLA) the other day. And I gotta tell you; for a young man, he can be pretty grumpy. It's driving him crazy that Tesla is currently worth more than great American bellwethers Ford (NYSE: F) and GM (NYSE: GM)... combined. 

I call him grumpy because I like to give him a hard time. But really, if you're not a little grumpy, you're just not paying attention. The Tesla/Ford thing is a legitimate gripe. Why should Tesla, which manufactures a fraction of the cars and employs a fraction of the people that Ford and GM do, be worth more than Ford and GM?

Ford and GM are better companies in just about every way you can think of. They sell way more cars, take in more revenue, earn more profits, pay very nice dividends, have been hitting sales records for like five years running, and both sell electric and hybrid vehicles. Yet, investors will tell you that Tesla is more valuable. 

My man Stuts will tell you this is nuts. He loves telling Tesla investors to get off his lawn. But the market remains steadfast: Tesla is the better stock. 

There are plenty of investors out there that will see a scenario like this and simply assume the market is wrong. And it might be, but it could also be that the 4% earnings growth that Ford saw this year just isn't enough to get investors excited. Own Ford for that huge 6.5% dividend if you want, but keep your expectations for the shares very low. 

More Stocks I Don't Like 

Well, oil stocks. Blecch. Sure, there are some very well run oil companies out there. American oil companies had to adapt to an oversupplied market or die. The speed with which they cut costs and boosted efficiency was amazing. The cost to produce a barrel of oil fell from around $60 to as low as $15 in less than three years. 

But own the stocks? No thanks. For one, most U.S. oil companies are carrying very high levels of debt. And the rate at which tight oil wells deplete is going to make it very difficult for companies to grow production and pay off debt. The fact that oil prices just can't hold at $60 doesn't help. Add in weak demand growth and steadily rising electric car sales, and it gets really hard to be bullish. 

PRO TIP: I like being a contrarian investor as much as the next guy. But there's more to being a contrarian than simply saying, "Well, everyone hates these stocks, they must be a good buy." Sure, buying what people don't want can be a great strategy. You'll want to do some digging and get the whole story. 

Renewable energy stocks are another group of investments that just don't ever seem to be able to get any traction. Take a look at First Solar (NASDAQ: FSLR) — a very well run company, with a forward P/E of just 14, PEG ratio at 0.71, and just about $1 billion in net cash. But the stock just can't hold gains. I had First Solar in The Wealth Advisory portfolio for a few years but had to sell because the opportunity cost of owning it was killing me. I think we made 25%.

Plus, I've watched two renewable energy stocks go private: Trina Solar and Pattern Energy (NASDAQ: PEGI), another former Wealth Advisory stock. There's clearly value in some of these stocks; they wouldn't get taken private if there weren't. I hate to admit it, but I have been unable to develop a theory as to why renewable energy stocks are such laggards. 

Forget the Long Shot 

I learned a long time ago that 99% of long shot stocks will stay that way. The last long shot stock I became interested in was JCPenney (NYSE: JCP). Five years ago, when a former executive from Home Depot (NYSE: HD) took over as CEO at JCP, I thought the odds were decent that the company could turn it around. Nope. That CEO has since gone to Lowe's (NYSE: LOW)

It's been fascinating to watch the winners emerge from the retail space. Target (NYSE: TGT) and Walmart (NYSE: WMT) both figured it out (strangely enough, groceries was the answer). Both Macy's and Kohl's look doomed. I will not be surprised to see one or both of these companies enter bankruptcy in the next 18 months. 

Now I got one for you: Amazon (NASDAQ: AMZN) — an amazing company. But you know, the stock hasn't done much since it flirted with that $1 trillion valuation back in 2018. And I don't think the stock is going to do much over the next couple of years.

Analysts are looking for +25% earnings growth for fiscal 2020. That's pretty optimistic. Now, granted, Amazon spent $33 billion on R&D last year (Apple spent $15 billion). Amazon can push some of that money to the bottom line and crush earnings estimates basically any time it wants. 

But Amazon's been moving into brick and mortar locations. As we've seen, you gotta execute flawlessly to make it with stores. Plus, Amazon's purchase of Whole Foods is not going well. I would not be surprised to see some write-downs. 

All in all, I think 2020 is gonna be challenging for Amazon. Spending is likely to go up a lot — bad news if you own Amazon stock, great news if you own what I call the "Prime Profits" stocks. You see, Amazon's got a small stable of unknown companies that help it execute its business model. 

And if Amazon starts spending more money on its business, well, these "Prime Profits" stocks are going to do very, very well. And you can buy them for a fraction of what a share of Amazon costs. You can learn more about these "Prime Profits" stocks HERE.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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