Thursday, December 14, 2006

When 'Buy What You Know' Doesn't Pay

As I penned my list of the Five Worst Managed Companies in the U.S. in October, I had several other companies in mind that were being considered for the article. However, upon closer inspection, these companies had a different theme that I would now like to discuss. Today's list of five inauspicious companies has one thing in common: They are companies with great products that are bad investments. As before, my list could be longer and you may have your own favorites. Also note, that these are bad investments but could be a decent trade from time to time. Without further ado, and in no particular order, here is Scott Rothbort's list of Companies With Great Products That Are Bad Investments:

1. TiVo (TIVO): The quintessential great product bad investment company. I told my wife six years ago that we had to buy a TiVo. She had no idea what a TiVo or DVR was at the time. Six years later, we can't live without it. In fact, we still have the original box and lifetime subscription that we originally purchased. You would think that TIVO had a great concept and would be printing money. No so. By far, TIVO is the best example of how to screw up the concept of giving away razors and making customers pay for the razor blade. Since going public and now for 31 consecutive quarters, TIVO has posted a loss. The most recent quarter was the same old story for TIVO: more losses; litigation issues; fiddling with subscription packages; and, delays in collaborative agreement. Buy a TiVo but not TIVO.

2. Six Flags (SIX): What can be more fun than a day with the family at the amusement park? Well maybe a day at the ballpark, but you get my point. You have to be a real misanthrope to hate amusement parks. Disney (DIS) knows how to build and manage an amusement park. SIX, on the other hand, has managed to deliver declining returns to shareholders. In fact, a weekly chart of SIX looks like a roller coaster ride: a big climb, a rapid fall, some ups and down and then return to terra firma. SIX has been under new management for several quarters now and, frankly, they have just continued the failures of their predecessors. As an example, they managed to bungle the Great Escape in the Lake George region. The geniuses at SIX repaved the Great Escape parking lot this year (it does look good), but in doing so initiated a $10 per car parking fee for the first time ever. There is a Yiddish terms to describe this decision: chutzpah (gall, audacity, nerve). So they spent lots of cash (heavily borrowed), charged to park, and attendance declined. Spend your hard-earned cash for a day at Six Flags but not for a single share of stock.

3. Vonage (VG): Get rid of land lines, give your local telephone company the Bronx cheer and use the Internet for telephone calls. Voice Over Internet Protocol (VoIP). Sounds great. Go ahead and use it. Many people are switching. We have not switched to VoIP but would consider it some day. My sister-in-law has gone VoIP. She is satisfied. I have heard pros and cons in the VoIP debate but nevertheless, I have to say, that as a product and technology it is a great concept. VG seemed to be promoting itself for years. I call it the longest road show ever. It was also the most bungled IPO since the Wilt Chamberlain debacle back in the 1990s. If you have or plan to use VoIP be careful and don't swap your old AT&T (T) stock for VG in the process.

4. Krispy Kreme Doughnuts (KKD): If you read Jim Cramer's Confessions of A Street Addict, then you would probably know Jim as someone who lived for a Krispy Kreme and a great stock idea. Unfortunately, KKD could only deliver the former and not the latter. Those delectable delights are irresistible. Even though the "Under New Management" sign is hanging in the Krispy Kreme window, you have to wonder whether the KKD business model is or ever was viable. Sales continue to decline. The baking business has always been tough. Dunkin Donuts has been handed from owner to owner for years with relatively little success. Just look at the history of Interstate Bakeries or Tasty Baking (TSTY). Bring a dozen Krispy Kremes to your next client meeting, but don't sell them on the stock. Nothing beats McDonald's (MCD) when it comes to a food service investment.

5. Alternative Energy Stocks: Let's reduce our dependence on fossil fuels and tell OPEC to stick it where the sun doesn't shine. It's like a bad gift: It's the thought that counts. This entire asset class gets the great product bad investment nod. We can use light, water, wind, steam or bovine excrement to generate energy for all I care. But even if Earth, Wind and Fire were to sing for us, it is highly unlikely that a stand-alone company is going to make you a dime in the alternative energy sector. Maybe some big-cap companies like Archer Daniels Midland (ADP) or a utility like FPL Group (FPL) can hide their alternative energy losses under the rest of their profitable portfolios. Occasionally, a Johnny-Come-Lately alternative energy stock will go IPO and get investors all lathered up in the first few months of life only to eventually succumb to traditional valuation techniques. The pink sheets and OTC bulletin boards are littered with the carcasses of alternative energy stocks.

Here is a Web site devoted to alternative energy stocks. Go ahead, knock yourself out, and try to find a stand-alone alternative energy investment. Over the long run, these are bad investments. In the meantime, think green, and invest in Exxon Mobil (XOM).

At the time of this Blog entry, Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of McDonald's (MCD) and Exxon Mobil (XOM).

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