Three Stocks to Sell Now, Three Bargains to Buy: John Dorfman

It’s time to unload some of this year’s hottest U.S. stocks. There are still good buys, though, among less glamorous equities.

Here are three stocks that in my opinion should be sold before year-end or as soon as you have held them for 12 months so you can get long-term capital gains tax treatment. I will also suggest three stocks to buy.

Foremost among my sell recommendations is Las Vegas Sands Corp., which operates casino-hotels and convention centers in the U.S., Singapore and Macau, China. Its stock has jumped 150 percent this year.

In 2009 almost three-quarters of Las Vegas Sands’ revenue came from Macau. Revenue growth there has been much faster than in the company’s home city of Las Vegas.

Macau is a small peninsula jutting off the eastern coast of China; it enjoys considerable political autonomy.

I believe Macau is an excellent gambling locale, drawing guests as it does from mainland China, where gambling is both popular and largely forbidden. But trees don’t grow to the sky, in China or anywhere else.

It its latest quarter, ended June 30, the company made $1.6 billion in revenue and $42 million in earnings. By my reckoning, the company is worth at least $2.5 billion (15 times annualized earnings) and at most $26 billion (four times annualized revenue).

Leaving Las Vegas

The actual value the stock market places on Las Vegas Sands is almost $25 billion, close to the top of my range.

The stock price of about $37 a share is 932.5 times the past four quarters’ reported earnings, and about 20 times analysts’ estimates for 2013 -- a date that in terms of predictability might as well be Star Date 2733.

My opinion of Las Vegas Sands isn’t shared by most analysts covering the company. Sixteen of 25 firms rating the company call it a “buy.”

Also way overextended in my view is New York-based Sirius XM Radio Inc. I do not like the company’s capital structure, with almost $17 in debt for every dollar in equity.

Sirius stock is up 115 percent this year and sells for 129 times recent earnings. You might surmise that earnings must be terrific. Yet Sirius has posted losses every year since it went public in 1994. Analysts expect it to break into the black this year and earn a profit -- of less than a penny a share.

Vulnerability Concerns

Next consider OpenTable Inc., which pioneered a system by which diners can make restaurant reservations online at no charge. The company gets its revenue from participating eateries. My concern is that this is a business with low barriers to entry.

You’d never think so to look at the stock price. San Francisco-based OpenTable has surged 146 percent this year and fetches 160 times recent earnings. Sales and earnings are growing very fast, but the company is just a baby -- it was founded in 1998 and went public in 2009 -- with revenue of $69 million last year.

Now let’s turn to some stocks I think a rational investor might buy.

All three of these stocks passed my Old Faithful screen, which requires average annual earnings growth the past five years of 15 percent, a return on equity of 15 percent or more, a price-to-earnings ratio of less than 15, debt less than 50 percent of equity, and a price-to-sales ratio below 2. Fewer than 30 U.S. stocks pass that screen at the moment.

Uninterrupted Profits

I’m impressed with Ross Stores Inc., which is located in Pleasanton, California, and operates a nationwide chain of off- price clothing stores.

During the recession, Ross’s earnings rose. It has reported annual profits every year since 1988. It earned a 41 percent return on stockholders’ equity in the fiscal year that ended in January. The stock is up 31 percent this year but still sells for a moderate multiple, 13 times earnings.

I like World Fuel Services Corp. The Miami-based company offers fuel, maps, flight plans and other services to operators of planes and boats. It does business throughout the world but gets most of its revenue in the U.S., Singapore and the U.K.

With barely a speck of debt on its balance sheet, World Fuel Services earned a 17 percent return on equity last year. Its earnings have risen every year since 2000 and are expected to advance 16 percent this year to $2.27 a share. The stock is little changed this year and sells for 12 times earnings.

No Glamour

One more unglamorous stock I like is National Presto Industries Inc., based in Eau Claire, Wisconsin. Many people know it for its small household appliances, including pressure cookers. Yet the company actually gets most of its revenue from defense products such as ammunition and cartridge cases.

National Presto stock has risen 8 percent this year and sells for 12 times earnings. No Wall Street analysts follow it.

Prosaic these companies may be. Nevertheless I think all three of them are much better bets than the high flyers such as Las Vegas Sands, Sirius XM Radio and OpenTable.

Disclosure note: I have no long or short positions in the stocks discussed in this column.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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