3 scary stocks to dump before Halloween

Ghosts and goblins won't get you Saturday night. But owning these so-called 'hot stocks' might.

By InvestorPlace Oct 29, 2009 12:59PM
By Michael Shulman

devil with cashGhosts and witches shouldn't scare you this Halloween. Owning stocks that will drag you down should. Here are three truly scary stocks to dump now. What makes them so scary? Investors' infatuation with these companies, for one. These stocks attract a lot of attention -- and money -- from investors. Only problem is they're bound to lose you money.
Remember, the market crashed for good reason -- the financial system was on the verge of a Great Depression-type meltdown, and the economy was quickly following. For technical reasons, and because of the vast amount of liquidity the Federal Reserve and U.S. Treasury has injected into the market, we've seen a huge rally since March. The Street wants to see real growth next year, but it will be disappointing.

And when the Street finally starts evaluating companies based on the assumption that the massive injections of liquidity are winding down, these stocks will be some of the worst companies to own because their fundamentals in no way support their inflated prices.

If you hold any of these stocks mentioned in your portfolio, you should be frightened. These are stocks you should stay far, far away from or, better yet, you could profit by shorting them through put options when the market begins to come to its senses.

Here are three scary stocks to dump -- or short -- now:

Scary Stock #1: Palm

Palm (PALM) is the unfortunate company that has to go head-to-head against Apple's (AAPL) iPhone and Research In Motion's (RIMM) BlackBerry, not to mention both companies' enormously deep pockets. PALM will not win against such stiff competition.

Palm continues to lose money and burn cash faster than the Bush and Obama administrations. On Aug. 31, it had $277 million in cash and receivables and $522 million in payables and short-term debt, while long-term debt is $389 million. And this is a company that may generate $400 million in revenue next year, and perhaps $500 million the year after, but no profits!

Barring an acquisition by a company dumber than Palm (where are the Chinese companies when you need them?), the stock is worthless.

Scary Stock #2: OpenTable

OpenTable (OPEN), a company that allows people to make restaurant reservations online, is a cult stock that's unspeakably overvalued.

Think about it. Restaurants, especially higher-end ones, continue to lose business as consumers pinch pennies, and OPEN is a pure play on the restaurant business. This non-tech outfit is selling for six times revenue and 100 times forward earnings based on analyst estimates.

Management says it will fuel growth by expanding in Europe, but have you ever been to the typical high-end European restaurant? Fugheddaboudit! Management and other insiders just dumped a humongous number of shares in a secondary offering, which didn't raise any money for the company -- it just let investors and managers get liquid. Not good.

Scary Stock #3: Wynn Resorts

Wynn Resorts' (WYNN) Steve Wynn is a guy I really love. He went from a bingo parlor operator to the world's most famous and innovative casino operator -- all while battling near-blindness from retinitis pigmentosa. He brought Frank Sinatra, the Mirage, Bellagio and the Wynn to Las Vegas, bought this, sold that and just brought $1.5 billion back home by cashing in on an IPO for his Macau venture.

He is one cool customer, but financial success in stock markets does not mean people are spending more money -- in fact, they are spending less. There will not be much growth in Las Vegas or Macau. In fact, I believe Las Vegas is gong to be seriously impaired for at least several years, and WYNN is radically overvalued.

Most importantly, in the short term, the stock is headed down and just dipped below its exponential six-month moving average, and is now hovering just above its 50-day moving average. Oh, and it is selling for 100 times earnings.

Finally, Mr. Wynn does not have a history of returning cash to investors; rather, he spends it on new hotels and casinos.

So in addition to treating yourself to candy Saturday night, treat your portfolio to a clean-up. Click here to see all 5 Scary Stocks to Dump for Halloween.

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