A bull market makes investors feel great. Awesome returns across the stock universe can make everybody feel like a genius, and that investing in stocks — even fairly indiscriminately — is a sure bet.
Feel-good times create a problem that’s easy to overlook. Take a close look at quite a few stocks these days and many companies’ stock prices have little or nothing to do with actual business quality or financial success.
Beware the stocks for which common sense dictates the following response: “Seriously?!”
Best Buy Co., Inc. (NYSE:BBY) comes to mind as one of the high-profile examples. The stock has skyrocketed in recent months, and that’s despite the fact that there’s no real proof of a turnaround in sight.
The electronics giant’s most recent quarter should have been viewed as a major disappointment. Sales and profit dropped, as did same-store sales. It’s losing ground fast. However, the stock has surged by 36% in the trailing-52-week period, with most of the gain having taken place in the last several months.
Maybe some investors are heartened by recent news about Microsoft Corporation (NASDAQ:MSFT) stores-within-stores, as well as Samsung’s entry into Best Buy Co., Inc. (NYSE:BBY) outlets. However, I’d question such assumptions as all that helpful to growth for Best Buy. For example, Microsoft Corporation (NASDAQ:MSFT)’s cool cachet doesn’t hold up to a company like Apple Inc. (NASDAQ:AAPL). And if customer traffic’s dragging, even an enhanced experience will mean little anyway.
CONN’S, Inc. (NASDAQ:CONN) is another denizen of the electronics retailing space and adds furniture and appliances to its offerings. The insane trajectory of Conn’s share price is quite frankly mind-boggling. The stock has more than doubled in the course of the last 12 months.
The eyebrow-raising aspects go beyond the simple fact that this consumer segment isn’t an easy one, especially taking into account the renowned “showrooming” effect that drives customers to Amazon.com, Inc. (NASDAQ:AMZN).
Conn’s direct lending to its customers differentiates it from rivals — and makes it riskier, too. Last year, it financed 71% of its retail sales. According to Conn’s most recent Form 10-K, the majority of its customers had credit scores between 500 and 650, below the score considered a very good credit history. Those who don’t make the grade can take advantage of rent-to-own arrangements. According to Conn’s 10-K risk factors, many of its borrowers would be considered “subprime.” That should ring a bell, and not in a good way.
Lending and consumers’ ability to actually pay back borrowings is a significant factor. The possibility of rising interest rates and continued pressures on consumers in the real economy creates uncertainty that Conn’s skyrocketing growth is wired to last. CONN’S, Inc. (NASDAQ:CONN)’s growth is being financed, its stock is on borrowed time, and like the market rally, that party looks destined to come to a screeching halt.
In other words: Seriously?
Those who invested in Netflix, Inc. (NASDAQ:NFLX) at its 52-week low of $53 must be feeling pretty good right about now. Too bad the stock’s valuation is currently insane.
Netflix, Inc. (NASDAQ:NFLX)’s current forward price-to-earnings ratio is 65. High price-to-earnings ratios can sometimes be justified if investors believe growth expectations are far too low at the moment. However, I don’t see any reason to argue in favor of high growth rates for Netflix right now.
Bulls loved today’s announcement that Netflix, Inc. (NASDAQ:NFLX) and Dreamworks Animation Skg Inc (NASDAQ:DWA) have made a major deal for original content, but Netflix still has Amazon.com, Inc. (NASDAQ:AMZN) breathing down its neck. Amazon tends to get a lot of the hottest new programming before Netflix, Inc. (NASDAQ:NFLX)’s streaming service does, and at some point, consumers will tire of a service that often doesn’t carry the content they desire.