Get out your pom-poms, everyone, because earnings season officially kicked off last night with a profit warning from Alcoa (NYS: AA) . While that's not exactly the way investors would have liked earnings season to kick off, the vast majority of S&P 500 companies have met or beaten analyst expectations over the past few quarters.
However -- take a deep breath -- earnings estimates are falling globally. Between debt-contagion fears in Greece and a slowdown in U.S. government spending, profit projections are dropping, and investors are finally scrutinizing company earnings as they should have been doing in the first place. The recipe for failure is there this quarter, more so than in any quarter in recent history, so it pays to take note of companies which are on shaky ground to start with.
Below I've highlighted three companies that I feel investors would be better off letting be this earnings season. There's simply too much risk built into these stocks and recent results indicate bad news could be on the horizon.
Shanda Interactive (NAS: SNDA)
As much as I want to believe that the video game industry is resilient to a slowdown in the economy, it just isn't. In August, U.S. retail sales of video games fell by a staggering 23%. Although Shanda is based in China and operates multiplayer online role-playing games, this drag from the U.S. will almost certainly translate into more pressure on its already aching business.
Somehow Shanda has missed earnings estimates for seven consecutive quarters, yet still earns the right to trade at 38 times trailing earnings. How that's justified when Perfect World (NAS: PWRD) , which is also based out of China and is projected to grow at the same rate as Shanda over the next five years, trades at less than five times trailing earnings is beyond me. Gaming companies and peripheral suppliers simply aren't going to fare well this earnings season based on those August results. Do yourself a favor and avoid this entire sector this earnings season, especially Shanda.
Eastman Kodak (NYS: EK)
Despite popular belief, Eastman Kodak isn't dead ... yet. The former king of the film industry has been relegated to a pauper's role in recent years because of a medley of technological fumbles. It failed to recognize the power of digital cameras too late and also failed to understand how quickly commoditized its technologies had become. Now, the company has only its patents to fall back on because, aside from its printing business, its other divisions are practically worthless.
Even worse, Eastman Kodak recently released a statement implying that it would need to draw on its credit line to fund day-to-day operations. We've known that Kodak's cash pile has been dwindling, but this news provided the first indication of how serious things really are. Following three straight earnings misses and a ballooning debt load, there's simply no value here for shareholders to cling onto. Remember, if you see the bomb squad running away from you, follow them!
Netflix (NAS: NFLX)
I know I've been picking on Netflix a lot lately, but then again, who hasn't? The company has become the laughing stock of Wall Street as it attempts to single-handedly destroy its reputation. I still haven't quite figured out what's worse: the flip-flopping on Qwikster, raising prices by 60% on a service which doesn't add any extra value to customers, or simply admitting that it has no clue what its customers want?
Either way you look at it, Amazon.com's (NAS: AMZN) streaming business and Coinstar's (NAS: CSTR) Redbox DVD rentals will likely see a large surge in business at the expense of Netflix. In September, Netflix was forced to revise previous subscription loss estimates downward by 1 million more than its subscriber projections in July. In short, the earnings report here is bound to be ugly and rife with huge customer losses and what I suspect will be some heavy corporate backtracking. I'd put this stock back in the envelope and send it back from whence it came.
The risks outweigh the rewards with these three stocks, plain and simple. If you can keep your emotions in check, you'd see there are plenty of red flags for these companies and you'd be best off avoiding them prior to their earnings report (and likely after!).
Agree or disagree with my synopsis? Share your thoughts in the comments section below and consider adding Shanda Interactive, Eastman Kodak, and Netflix to your free and personalized watchlist to keep up on the latest news from each stock.
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. His crystal ball is currently in the shop for repair so he welcomes all contrary views. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, and Coinstar, as well as creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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