There should be a reality television series called "To Catch a Falling
Knife" in which some poor investor tries to buy a stock he thinks is being
sold off for no good reason and then we get to watch what happens as his hands
start bleeding. Sometimes stocks sell off for good reasons, and sometimes they
don't. In either event, the stocks most vulnerable to massive selloffs are the
momentum plays high-growth companies that suddenly get a stick in the eye when
their story changes. These three companies have sold off big-time from their
highs, all because of what I believe are fundamental issues surrounding their
core business models. Green Mountain Coffee Roasters Green Mountain Coffee
Roasters (NASDAQ: GMCR ) was ground for a single-day loss of $30 earlier in
November. Part of this drop was attributed to a disappointing fourth-quarter
report on revenues. The other issue, however, is an SEC investigation
surrounding the company's accounting. Now, I want to make it clear that this
doesn't mean anything improper is going on at Green Mountain. However, one
hedge fund manager, David Einhorn, has made the case that there is, the media
has taken hold of his thesis, and the stock has suffered. He's also pointed to
serious cash flow issues at the company. I can only speak to the disappointing
revenue numbers and cash flow. In the FY ending this past September, GMCR had
negative free cash flow of $283 million, which expanded from -$128 million in
2010 and -$10 million in 2009. This is a really bad sign in my view. Of even
greater concern is that even with Green Mountain stock down 50% from its highs,
only three insiders have purchased stock for a total of about 6,000 shares.
That's nothing, and it doesn't give me confidence. Einhorn also has a great
track record. I would stay far away from Green Mountain at this time. Netflix
Green Mountain might very well survive over the long term, but I don't think
such will be the case with Netflix (NASDAQ: NFLX ). I'm so sorry to write
this, because I love Netflix! However, my thesis is simple as to why it won't
survive. Streaming eventually will replace DVDs. The DVD model is such that
Netflix can buy a DVD and rent it as often as it wants. With streaming, it must
pay a license fee to stream the content, and that has proven to be very
expensive. Netflix has a cash problem . Its competitors current and future do
not. By that I mean Amazon (NASDAQ: AMZN ), Google (NASDAQ: GOOG ) and Apple
(NASDAQ: AAPL ), all of which have billions of cash and cash flow. I think
Netflix is a short , although I'd use a tight stop-loss given its volatility.
IMAX Finally, I have to put the stink eye on another product I love IMAX
(NASDAQ: IMAX ). I love seeing movies in real IMAX! IMAX is expanding its screen
count rapidly worldwide, which is great for the company and great for revenue.
But once all those screens get installed, they'll be relying primarily on
joint-venture revenue with the studios, in which IMAX gets a 10% to 15% cut of
the box office and concessions from its screens. The problem is that the secular
trend is for people to move away from watching movies and to enjoying other
types of entertainment. Every year this past decade, save 2009, gross volume of
ticket sales has dropped. Not every film is an Avatar or Harry Potter , and
Hollywood's content continues to disappoint. Throw in the fact that only
limited genres play on IMAX as in, the most expensive and therefore more
infrequent films and IMAX's long-term revenues will be limited. It's not a
short right now because there still are years of expansion ahead. But I would
not buy in ever. Sorry to be a downer, but if you hold these stocks, I'd get
out now before your coffee gets cold, your DVD player becomes a paperweight and
IMAX starts playing Bridesmaids. As of this writing, Lawrence Meyers did not
hold a position in any of the aforementioned stocks.
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