Some Stocks Are Just Too Dangerous

 | Dec 20, 2012 | 6:37 PM EST  | Comments
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Stock quotes in this article:

mlnx

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mdrx

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hlf

I've got not one, not two but three cautionary tales about what happens when you wander into battlegrounds, obvious battlegrounds that can be avoided.

In fact, today's action provides a battlefield manual of where not to go, where the interstitial machine gunfire is so overwhelming that you know you are going to eat lead. We've got three companies, Mellanox Technologies (MLNX), Allscripts Healthcare Solutions (MDRX) and Herbalife (HLF), all vying for worst battlefields out there.

Let's start with Mellanox Technologies. Here's one I put in the "sell block" a few months back, after it caught a gigantic gain. The Israeli semiconductor company had had a monster run. Next thing I know, the chief financial officer retired, and I thought it had just moved up too much, so I just said "enough already." Sure enough, Mellanox reported soon after, and it didn't have the best guidance, so I told people here to dump it. I said that while you can never get out at the top, I thought that once the stock was broken, it would stay broken.

And that's just what happened.

There are some obvious lessons here. When a CFO departs, even if the move is orderly, it is worth it to ring the register particularly, after a colossal run. Then once a red-hot stock reports a weak quarter, it doesn't pay to hang around, as the momentum people will sell relentlessly.

That's what is happening in today's action.

Then there's Allscripts Healthcare solutions, another hammered stock today. Allscripts, another "sell block" name, had faltered badly and lost out to Cerner (CERN) for a lot of business. I had urged people to bolt from it, but the CEO of Allscripts, Glen Tullman, tried to sell the company. I say over and over again that you can't speculate on a takeover if the fundamentals are in decline as they were with Allscripts, because who wants to buy a faltering business?

Apparently no one; Tullman was fired last night.

Finally there's Herbalife. What can I say that hasn't been said about Herbalife by the principal, Michael Johnson, and the antagonist, Bill Ackman? I will tell you what: If Johnson doesn't file a tortious interference action against Ackman, maybe he's just doing a whole lot of passionate talking and nothing more. Ackman's goal seems to be to expose Herbalife as a pyramid scheme, to warn people not to work for it. Given how recruiting potential salespeople is integral to the business, you can argue that Ackman is trying to take the business down with his comments. Johnson has got a study that shows that his company produces merchandise that is largely consumed by people who are outside his distribution network, and that means, per se, that Ackman is wrong, at least if you believe in the merits of the study.

But I am not discussing the merits of Ackman's arguments or Herbalife's counterarguments. I am simply saying that those who have asked me what level I would buy Herbalife don't get me. I am not going to go over the top and face a hail of Spandau machine gun bullets. Let someone else be a hero.

These stories are all cautionary tales of the hard way to make money. When in doubt, stay away from takeover stories with faltering fundamentals and stories that have vociferous players on television telling you that the stock is going to zero.

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