This could be the end for these high-flying stocks

 

What we’re doing today is a form of speculation. Usually, stock market speculation means risking a small amount of money in the hope that it will become a very large amount of money over time, but not today. Today, we are looking at established stocks that face a small but very real chance of total collapse. In other words, we are identifying reverse speculations—situations in which a very large amount of money could be turned into a small amount of money—so we can avoid them.

As for the risks themselves, they are not mere speculations, but serious issues that have been widely reported on. When a risk is well known, it is generally priced-in, but not always. In cases where the risk is small and the consequences are potentially catastrophic, people tend to look the other way. This phenomenon seems to be based on something inherent in human psychology and was described thoroughly by Nate Silver in The Signal And The Noise. So, are these particular risks ones that you can safely ignore? I ask, why ask, when there are so many stocks in great and relatively safe companies.

Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

Tesla (TSLA)

The case against Tesla recently has been bolstered dramatically and tragically by high profile crash deaths, including one man who drove into a pond and drowned and two teens who were reportedly trapped in a burning vehicle—a horror almost beyond belief. In neither crash was Tesla’s poorly named “autopilot” feature engaged, but many casual observers may not understand that, as, at about the same time, news is being released that Tesla’s autopilot feature malfunctioned seriously in a separate, non-fatal crash. This is all about perception, not reality, but for Tesla, perception, specifically the perception that the company has a magnificent destiny to save the world by helping to break humanity of its fossil fuel addiction, is what makes reality possible. Why? Because that perception is represented numerically by the company’s share price. If that share price were to fall significantly, as it has in the past, it could make it impossible for Tesla to raise money, thereby ensuring that the company succumbs to its very real financial difficulties. For a potential windfall, you might consider placing a small amount of money on far out-of-the-money TSLA puts, but otherwise, stay away from this one for now.

Chart courtesy of www.stockcharts.com

Cisco (CSCO)

Cisco currently controls about half the world market for ethernet switches, and the company has done a good job of keeping its many customers loyal for decades now, but competition has recently grown fiercer than ever. On one side, Cisco faces smaller, more agile companies such as Arista Networks, and on the other, it faces tremendous competition from white box (unbranded) equipment which, properly configured, can do the same jobs for much less. This threat has recently grown in severity as AT&T is now offering networking services using white box hardware, undercutting Cisco’s prices. That’s very bad news for Cisco, particularly since the company, with its -3% profit margin, can’t really compete on price. This is one of those “risks” that’s actually a “for sure.” You may have a chance to invest in a smaller, leaner, cheaper version of Cisco in the future, but there could be a lot of time and a lot of pain before that day comes.

Chart courtesy of www.stockcharts.com

Roku (ROKU)

Roku was effectively made obsolete by smart TVs long before the company went public back in September. The risk here is that the public will realize it, and that’s not so far-fetched, given that prices for large, flat screen, 4K smart TVs are falling fast, and to astonishing lows. Seriously, a newer, more powerful version of the TV I thought I got a deal on at $1,200 in 2016 is now on sale at Costco for about $500. Roku is gadget company, and no one needs the gadget anymore. I don’t think you’ll be hearing much about this company a year from now.

Chart courtesy of www.stockcharts.com

Toyota (TM)

I’ve expressed optimism in the past that Toyota was on the road to recovery, and this is due, in no small part, to TM’s trailing P/E ratio of 8.8, which is so low that investors could profit, even if the recovery is only lukewarm. Ah, but one must always be ready to reevaluate the value of anything based on the seldom idle tariff threats of President Trump. After calling off a trade war with China (to Wall Street’s great happiness), the president almost immediately began speaking of opening another front, this time, on imported cars. This isn’t 1985, but the USA is still a huge market for Toyota, and if it collapse to any significant degree, that 8.8 might turn out to have been too high.

Chart courtesy of www.stockcharts.com

Schlumberger (SLB)

Schlumberger is a large, $100 billion oil services company. The price of oil has staged a dramatic rally over the past year, but revenues in the oil services industry have not followed suit. This apparent tight-fistedness on the part of oil companies is a known issue, and one thoroughly priced-in to the stock. What isn’t priced in is the risk the company runs by its increasingly close ties to Russia. Regulators are already looking at some recent Schlumberger deals to see if they violate the letter of current US sanctions against Russia, though by continuing to work with Putin, the company has clearly violated their spirit. If the US puts more sanctions in place—a possibility that grows ever more likely—this company is in trouble. The risk/reward relationship here is garbage.

Chart courtesy of www.stockcharts.com

Symbols: CSCO ROKU SLB TM TSLA
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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