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Monday, June 2, 2014 - 15:45
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Monday, June 2, 2014 - 15:45

3 High-Flying Stocks In Danger Of Takedowns

Monday, June 2, 2014 - 3:45pm

Once you get a certain impression about a stock, it can be tough to change your mind.

For instance, when I think of the three stocks I'm going to talk about today, my mind goes back to the times over the past couple of years when all three looked like they were on the verge of collapse.

Yet today those stocks have shown tremendous gains over the past year, and bullish sentiment is on the rise.

But before you invest in these comeback kids, beware...

These stocks may set you up for a tumble down the road -- particularly if you buy into recent high prices.

After all, revenue growth is still the name of the game, and these companies are all struggling to find it for the long haul. Let's take a closer look.

Pitney Bowes (NYSE: PBI)

It's hard to believe, but Pitney Bowes is up over 80% in the past year. That's hard to believe because just over a year ago, the company reported a jaw-dropping year-over-year drop in earnings of 58% -- fallout from a steep multi-year sales decline -- and cut its dividend in half.

PBI Chart
PBI data by YCharts

Pitney Bowes' problems are many, but they start with its mail and metering business, which has historically been its cash cow. The simple fact is that the mail business continues to decline. In fact, given the rapid technological changes in the sector, I wouldn't be surprised if, in five years or so, we get every bill and catalog by email (or perhaps even through Amazon.com (Nasdaq: AMZN)).

With mail heading down, where is PB going to grow? Among its three main business units, the only growth engine is digital commerce, with little to no growth expected from the other two units.

While management recently tried to make a case for growth within those units, it also provided very conservative forecasts. CEO Mark Lautenbach has identified a revenue growth range of negative 1% to perhaps 2%. That all signals PBI is hoping for flat revenue growth for 2014 -- a scary long-term scenario for anyone putting new money to work at PBI today.

Some things have gone right, as in part due to layoffs, facilities closings and asset sales, Pitney Bowes is making strides to at least "right-size" against the revenue targets. But over the past three years, those cost cuts have merely kept pace with the revenue drops. Is there an upside? Well, with cash flow still in the black, PBI's dividend (currently yielding 2.8%) looks fairly safe.

Hewlett-Packard (NYSE: HPQ)

Hewlett-Packard may be the ultimate shake-your-head story, as Meg Whitman is now in her fourth year of converting disbelievers. Just two years ago, HP posted a staggering $8 billion loss and appeared to be headed for the technological abyss. Yet HPQ continues to show resilience, up nearly 38% in the past year.

HP's recent quarterly results showed nice gains in earnings and cash flow, but HPQ once again saw sales decline, and worse, gave a lower forecast for 2014 than expected.

Then what's HP doing so right that investors are bidding the company up higher? Simple: Cutting -- no, gutting -- the company. HP expects lay off an additional 16,000 employees on top of the 34,000 it initially anticipated -- a total of nearly 50,000 jobs lost.

But the underlying problem remains: HP simply can't grow its way out of trouble.

HP's year-over-year drop in revenue in the first quarter was its 11th in a row, and in a world of rapidly shrinking PC sales and margins, few new products to crow about (and a very low R&D budget), and a continued dogfight with rivals like Cisco (Nasdaq: CSCO) and IBM (NYSE: IBM) in the enterprise space, Whitman's company is looking like an ice floe headed toward warmer waters.

HPQ

To me, the only reason for optimism is that with its gigantic installed base, HP generates around $3 billion in cash flow -- more than enough to service its 1.9% dividend yield, with enough left to continue buying back stock.

Best Buy (NYSE: BBY)

Electronics retailer Best Buy appeared headed for the same fate as former rival Circuit City until CEO Hubert Joly took over in August 2012. BBY had cratered to nearly $12 and was still recovering from a fight with founder Richard Schultze.

Joly's turned the company around through a shrewd combination of cost-cutting, changes in the look and feel of its stores, and an ability to turn showrooming consumers into paying customers. BBY soared, reaching a 52-week high of just over $44 in November -- but that was short-lived, as the stock was nearly carved in half in January after a weak holiday season.

BBY Chart

BBY data by YCharts

Still, earnings in its just-ended first quarter showed gains over last year, with earnings per share (EPS) of $0.33, well ahead of the $0.20 expected by analysts and edging last year's $0.32 cents. Thank cost cutting for most of that performance.

The telling trend for BBY is slower revenue growth across the board. Indeed, Best Buy's first-quarter revenue was down 3.3% from the same period a year ago, and same-store sales, a critical indicator, fell 1.9%. The company also reduced its forecast for same-store sales for the second and third quarters of this year. That can't be good.

The road to revenue growth is a tough one for Best Buy. The economy is still struggling, and as StreetAuthority's David Goodboy points out, "an investment in Best Buy is not only a bet on the continued good fortune of the brand -- it's a bullish bet on the global economy."

Beyond a slow growth economy of course, is competition, with the 800-pound gorilla that is Amazon always a threat to any online retailer. Throw in Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) as formidable competitors, and it's clear Best Buy will be under further revenue pressure.

Risks to Consider: All three companies could linger for years to come with further cost cuts. Similarly, all three are throwing off enough cash to sustain their dividends, which could lead them to become dividend traps.

Action to Take --> With PBI trading right around a 52-week high, it has the potential for a long-term fall on any revenue miss. Hold off on any new money for PBI unless you see it fall below $24, or around 11%.

If HP shows signs of slipping further on revenue, HPQ shareholders could get a very quick, very ugly haircut from a price today that is hovering around $33.50 per share. I wouldn't look to commit any money at over $30.

BBY shareholders already have the jitters, as shares are down to just under $27 per share. I still don't think that fall is enough however, and wouldn't hit the "buy" button for anything over $23 a share.

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Marc Bastow does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.