5 rocket stocks that could fizzle out
Posted
Jul 14 2009, 03:26 PM
by
CAPS Editor
Rating:
This post comes from Rich Smith of partner site The Motley Fool.
It's the worst nightmare of every investor in today's market -- buying a rocket stock just before it takes a nosedive.
Now I readily admit that sometimes stocks rise for a reason. But sometimes, the rise becomes the reason. No matter how often we caution them not to, investors have a habit of buying "hot" stocks, and trusting momentum to keep 'em moving upwards.
Problem is, if the price goes up too much, even a great company can turn into a lousy investment. Below, I list five stocks that skyrocketed but could be ripe to fall back to earth:
· Targa Resources Partners (NGLS) is up 89% this year to $14.66. At CAPS, the natural gas company has a five-star rating.
· Trina Solar (TSL) is up 145% this year to $22.86. At CAPS, the maker of photovoltaic products has a two-star rating.
· Rite Aid (RAD) is up 326% this year to $1.32. At CAPS, the drugstore chain operator has a two-star rating.
· Sirius XM Radio (SIRI) is up 225% this year to 39 cents. At CAPS, the satellite radio provider has a two-star rating.
· InterOil (IOC) is up 170% this year to $28.40. At CAPS, the oil and natural gas company has a one-star rating.
While each of these stocks has enjoyed remarkable gains, the consensus among the 135,000 investors at MSN CAPS is that most have come too far, too fast.
That worry may be well-founded for some of these companies. Fools fret that an impending price hike might scare off customers at Sirius. Rite Aid just dodged the bullet on a potential reverse share split -- only to find its stock rocked by anemic June comps. And although Trina Solar survived this month's LDK Solar (LDK) scare-off fairly well, tumbling silicon prices have prospects looking increasingly cloudy for solar plays such as First Solar (FSLR). Perhaps Trina's due for a tumble of its own?
Whatever the fate of these companies, there's one stock on today's list that's causing few misgivings: Targa Resources Partners.
As CAPS participant "paulshoe" recently pointed out, natural gas prices have been beaten down but are unlikely to remain low for long. "Even in a slowing economy, you have to heat your house. Dividend yield, book value, P/E, growth potential (and) solid management are all screaming 'buy ME (NLGS).'"
But it's the dividend yield of 14.2% that is yelling the loudest of all. CAPS member "bothisellhigher" says the dividend, while high, appears to be sustainable given that the Houston company has been "steadily increasing quarterly dividends since 5/15/07."
CAPS All-Star "rdpatton" also thinks Targa will maintain its dividend. The company is "reasonably well-hedged," rdpatton wrote in February, and "distribution looks secure for 2009, with low risk of debt covenant violations."
Me, I'm not so sure. I mean, Targa's dividend yield sure looks attractive, but I've my doubts as to how long a company can continue to pay out $2.07 a share when it's earning only $1.24 -- and when those earnings are expected to decline this year and fall nearly 50% short of the dividend's requirement next year. To me, Targa's situation would look pretty tenuous even if it were not carrying a debt load equal to its own market cap (and it is).
That said, Targa's price doesn't look all that high -- the price-to-earnings ratio is just shy of 12. Furthermore, analysts expect to see strong double-digit growth next year, trailing off to a long-term growth rate of about 8%. Seems to me that while Targa may not be able to sustain its current dividend, it could cut the divvy substantially (say, by half) to conserve some cash while maintaining a respectable 7% yield and still work out as a reasonably profitable investment.
But that's just my opinion. If you agree with bothisellhigher and rdpatton that Targa's dividend is secure, here's your chance to argue the point. Click on over to CAPS and tell us what you think. Or alternatively, maybe you think the dividend is toast, and the stock too? CAPS is the place to make that argument as well.
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