Avoid these single-digit stocks in 2013
When looking for bargains, don't be fooled by low prices.
A common misconception among investors is that a stock's price tag indicates its true value. For example, some investors may believe that Apple (AAPL) is expensive because it trades for over $586 a share. That logic ignores the fact that Apple trades at just 10 times next year's earnings, which is, in fact, inexpensive relative to many technology companies.
On the other hand, some investors may view Pandora (P) as cheap simply because it trades below $9 per share. That view comes despite the fact that the shares trade for almost 125 times next year's estimated earnings.
Rather, Apple and Pandora should tell investors that stocks can be "cheap" even when shares have high price tags, and pricey even when shares carry low price tags. The latter scenario underscores the wisdom of not being lured into a stock simply because of the superficial metric of market price. With that in mind, investors would do well to avoid or short the following single-digit names next year:
LDK Solar (LDK): A stock that trades for less than $2 and has surged more than 27% in the past week can be seductive, but keep in mind this is a solar stock that fell more than 10% on Monday. China-based LDK slashed its full-year revenue forecast to $950 million to $1 billion from its previous $1 to $1.5 billion. The company also said it expects fourth-quarter revenue of $230 to $290 million, which is well below the consensus estimate of $552.35 million.
Forget $2, the shares closed barely above $1 on Monday and the average price target is just $1.16, implying little upside from current levels. LDK could easily trade for 50 cents or less before its sees $1.80 again.
Century Aluminum (CENX): Practically every aluminum stock has been taken to the woodshed this year due to falling prices of the commodity. In turn, lower prices result in slack revenue and profits for aluminum producers and that theme has permeated this space. Century Aluminum is a small-cap stock that trades at almost 41 times 2013's estimated earnings. On the other hand, investors can pay just a few pennies more and get Dow component Alcoa (AA) at just 12.4 times next year's earnings.
Caesars Entertainment (CZR): On volume that was better than double the daily average, shares of Caesars Entertainment surged almost 10% on Monday, but that does little to eat away at a loss of roughly 56% since the company's February IPO.
The reason for the recent bullishness in this downtrodden name is easily spotted, though highly flawed. Investors appear to be betting, no pun intended, that Caesars will join the special dividend craze and follow rivals Las Vegas Sands (LVS) and Wynn Resorts (WYNN) in issuing special payouts.
However, that would be foolish, as Caesars' balance sheet is less than fortress-like. It is the balance sheet that explains why this is a single-digit stock that is not a good value. Caesars has $20 billion in junk-rated debt and has to pay $1.5 billion a year in interest on that debt.
Paying $1.5 billion in interest annually means that until Caesars can boost its credit rating, an unlikely scenario in the near- to medium-term, the company is devoting almost double its current market cap to interest expenses. That is not an attractive proposition for investors. Nor is the fact that earlier this year Fitch Ratings said Caesars could find its way to bankruptcy court in the future.
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