The 22 Most Controversial Stocks In America

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Photo: American Apparel

The past year has seen no shortage of controversial stocks.Hedge fund managers have culled their skill at taking positions, staging huge publicity campaigns, and generating a lot of discussion around the stocks they decide to bet on with high conviction – or bet against.

Other stocks are controversial because their businesses are particularly consumer facing, which makes their brands all the more recognisable to the average retail investor, looking to get in on unfolding trends in retail or social media.

As a result, quarterly earnings reports from these companies are usually widely anticipated.

Best Buy (BBY)

Sector: Electronics Retail

52 Week Stock Performance: -41.2 per cent

What's Going On: Best Buy has had a rough go of it lately, and its same-store sales numbers reflect that. However, there may be hope for a turnaround -- this holiday season, Best Buy finally logged U.S. sales growth figures that weren't negative (though they were flat). The company lost a key executive in December, and former CEO Dick Schulze continues to attempt a buyout.

Bull Case: Shares could get a lift if new CEO Hubert Joly can execute a turnaround, or if Schulze actually succeeds in taking over the company. Furthermore, if sales continue to beat expectations, investors could come back to this stock.

Bear Case: Best Buy is experiencing troubles facing the entire brick-and-mortar industry -- like showrooming -- and deteriorating cash flows could make it less likely that Schulze is successful in buying out the company.

Groupon (GRPN)

Sector: Internet

52 Week Stock Performance: -72.7 per cent

What's Going On: Groupon's stock was under pressure early in 2012 after its accounting firm said it had weak internal controls. A number of companies that use the service have warned of eye popping losses and higher than expected returns have weighed on results. Now, the company is shifting away from local deals to its newer 'Groupon Goods' business.

Bull Case: BofA says shares may rise if Groupon can 'successfully diversify away from local deals, and goods gross margins may improve.'

Bear Case: The problem with Groupon Goods is that it's a low-margin business -- whereas local deals were high-margin. BofA says this could create uncertainty surrounding earnings as Goods becomes a larger share of Groupon's business. (CRM)

Sector: Internet

52 Week Stock Performance: +67.4 per cent

What's Going On: Despite its inability to turn a profit and the large amount of short bets against the stock, shares of keep going up, leading many to question whether it's overvalued. However, it's a big name in cloud computing -- a trend investors love.

Bull Case: The company is growing subscribers and revenues at a steady clip and could be a big beneficiary of a structural shift toward cloud software.

Bear Case: The stock is overvalued and the company is unprofitable. Management could run into trouble attempting to manage such rapid growth going forward.

Green Mountain Coffee Roasters (GMCR)

Sector: Beverages

52 Week Stock Performance: -16.0 per cent

What's Going On: Green Mountain has been involved in a spat with high-profile hedge fund manager David Einhorn, who in late 2011 announced he was short the stock and called into question a number of the company's practices, including possible fraud. However, the stock has rebounded since November 2012 when the company appointed a new CEO and boosted its earnings guidance for 2013.

Bull Case: After massive buy outs of competitors, Green Mountain has reached a scale that would be hard for some competitors to copy -- protecting its high margin coffee business.

Bear Case: Investors remain sceptical of the company's internal controls. Furthermore, patents on Green Mountain's popular 'K-Cup' recently expired, leaving the door open for others like Starbucks to move into the market.

Netflix (NFLX)

Sector: Entertainment

52 Week Stock Performance: +8.1 per cent

What's Going On: Netflix, once one of the market's favourite momentum stocks, fell out of favour in a big way in 2011. In 2012, shares continued to languish on weak fundamentals -- that is, until activist investor Carl Icahn disclosed a 10 per cent stake in the company at the end of September. Since then, the stock has rallied.

Bull Case: Icahn could spur change at the company, as he has done with other investments in the past. The company also recently signed an exclusive content deal with Disney, which raises its profile and the quality of its offerings among competitors, according to Morgan Stanley.

Bear Case: The Disney deal was expensive -- inked for $500 million -- and BofA doesn't think Netflix will necessarily be able to add subscribers quickly enough to cover those costs. In addition, BofA expects domestic streaming -- one of Netflix's strongest businesses -- to come under increasing pressure from competitors.

First Solar (FSLR)

Sector: Technology--Semiconductors

52 Week Stock Performance: -20.9 per cent

What's Going On: Solar stocks plunged in 2012 -- the industry ETFs, TAN and KWT, were both down around 40 per cent. FSLR, as the industry bellwether, was not immune to the price declines.

Bull Case: Rapid declines in crystalline solar module pricing have hurt First Solar, but BofA thinks those declines may be over, and the company could get a good chance to improve its cost structure in 2014.

Bear Case: Europe -- a key market for solar -- will see solar subsidies under continued fire as fiscally-stretched governments attempt to bring budgets into balance. Furthermore, Morgan Stanley expresses uncertainty over projects in First Solar's pipeline. Finally, low prices for natural gas could curb demand for other alternative energies like solar.

Lululemon (LULU)

Sector: Retail

52 Week Stock Performance: +12.4 per cent

What's Going On: Lululemon shares endured a serious selloff in mid-2012 after a nice run-up to start the year. Momentum traders love this name for its robust projected growth, but they are willing to pay up for it too -- the stock trades near 42 times earnings.

Bull Case: Lululemon is growing quickly, and it still has a huge, relatively untapped market ahead of it -- men's apparel.

Bear Case: Morgan Stanley says 'the key debate is when LULU shifts from a growth stock to a cash flow play and multiple contraction begins. The answer likely hinges on the international story, which remains unquantifiable.'

Facebook (FB)

Sector: Internet

52 Week Stock Performance: -20.7 per cent

What's Going On: Facebook, the most highly-anticipated IPO of 2012, was a massive disappointment. Shares were offered at $38 but fell immediately, bottoming out below $18 in early September. Since then, the stock has managed to climb back to just below $30.

Bull Case: JPMorgan, which has a buy rating on the stock, says 'it remains very early in the trajectory of Facebook's mobile advertising,' a common sentiment among those bullish on Facebook.

Bear Case: At a price-to-earnings ratio near 50 and an enterprise-value-to-EBITDA ratio over 20, the stock is arguably significantly overvalued.

Zynga (ZNGA)

Sector: Internet

52 Week Stock Performance: -70.9 per cent

What's Going On: After topping out around $15 per share in March 2012 following an IPO in December 2011, Zynga shares have gone straight down to their current levels, around $2.50 per share. The company is closely tied to Facebook, the platform for its most popular virtual games.

Bull Case: BofA says social gaming is a trend in decline, and Zynga could face some trouble with bookings as it transitions to mobile.

Bear Case: On the other hand, BofA says 'real money gaming' could be a gamechanger for Zynga if online poker is legalized in the United States.

Dell (DELL)

Sector: Technology

52 Week Stock Performance: -17.4 per cent

What's Going On: 2012 was not a good year for shares of the beleaguered PC-maker. However, news this week that private equity investors led by PE giant Silver Lake Partners have caused the stock to spike. However, it's still unclear whether the deal will be consummated.

Bull Case: Goldman Sachs upgraded Dell shares to 'buy' from 'sell' in December, saying that the secular drop in PC demand has become part of the bearish consensus on the stock. Any surprising indications that the drop in demand is not as bad as expected could lift shares.

Bear Case: If the buyout deal fails to go through, Dell may lose the premium it's gained since the offer was announced. Furthermore, if PC demand data surprises to the downside, it could be bad news for Dell shares.

Chesapeake Energy (CHK)

Sector: Energy

52 Week Stock Performance: -18.5 per cent

What's Going On: Chesapeake Energy shares languished in 2012 after it was revealed that CEO Aubrey McClendon had been using his personal stake in company oil wells as collateral for financing those same stakes. Now, the company is engaged in big asset sales to cover liquidity concerns.

Bull Case: The outlook for Chesapeake hinges on its ability to sell assets and pay down debt, continuing to repair its balance sheet. BofA thinks the outlook here is good -- and has a $35 price target for the stock.

Bear Case: JPMorgan, which is bearish on the stock, says 'Chesapeake still has a lot of assets to sell to avoid further liquidity issues during 2013, adding that 'valuation wise the stock is not cheap, and the company still has financial risk.'

Apollo Group (APOL)

Sector: Education

52 Week Stock Performance: -64.5 per cent

What's Going On: Apollo Group was one of the worst performing stocks in 2012. It fell victim to a broader selloff in for-profit education companies as enrollment numbers declined, federal regulators cracked down on the industry, and the stocks fell out of favour among investors.

Bull Case: JPMorgan gives the stock a buy rating, citing Apollo's dominant market share position and cost cutting initiatives that are running ahead of schedule. Bad debt expenses are also declining as management attempts to stage a turnaround.

Bear Case: Apollo Group's flagship business, the University of Phoenix, has been put on 'notice' by the institution that gives it accredited status. An unfavorable development in the case could be bad for the stock.

Chipotle Mexican Grill (CMG)

Tesla (TSLA)

Sector: Automotive

52 Week Stock Performance: +48.6 per cent

What's Going On: Tesla shares had a mostly sideways 2012 after an initial run-up at the beginning of the year. The company, a niche maker of electric-powered sports cars, has plenty of demand for its product, but has struggled to meet that demand with production capacity as the young brand grows.

Bull Case: Tesla's earnings report in November revealed that the company was able to exceed its production targets in Q3 2012. If that performance continues, Jefferies analysts write, 'With eye-catching cars hitting the roads, rapid expansion of retail stores, and gushing reviews, it's hard not to go along for the ride.'

Bear Case: JPMorgan says that for Tesla, execution risk remains elevated: 'Tesla simply has yet to demonstrate it can produce Model S vehicles at the combination of volume and margin assumed in its business plan.'

Bank of America (BAC)

Sector: Banks

52 Week Stock Performance: +74.7 per cent

What's Going On: Bank of America has for years been waylaid by legacy issues stemming from its ill-fated acquisition of Countrywide Financial in 2007. Since then, the company has been dealing with accusations of mortgage fraud and has been forced by regulators to pay out multi-million dollar settlements.

Bull Case: If BofA is successful at continuing to lay legacy mortgage issues to rest, it could remove a big headwind facing the stock. Furthermore, the recovery in the U.S. economy -- and housing in particular -- bodes well for the bank.

Bear Case: BofA is highly levered to the housing market and the broader U.S. economy in general. A turn for the worse in either of those would be bad news for the stock.

Sears (SHLD)

Sector: Retail

52 Week Stock Performance: +33.2 per cent

What's Going On: Hedge funder Eddie Lampert is the biggest holder of Sears stock, and is now CEO since the company's former CEO abruptly resigned last week, citing 'family health matters.' However, there is concern over whether Lampert has the expertise to turn the troubled retailer around.

Bull Case: Sears is making some progress on improving its financials, and the resignation of its CEO could offer an opportunity to bring in some fresh blood in at the top.

Bear Case: The numbers could get even worse, or they could fail to improve quickly enough to shift investor sentiment. ISI Group analysts write, 'Given the very weak store base, continued comp declines, and anemic sales productivity, we can't forget that second derivative positive for SHLD is still solidly negative (although these results are a YoY improvement).'

Manchester United (MANU)

Sector: Entertainment

52 Week Stock Performance: +8.9 per cent

What's Going On: Manchester United's IPO in August was a bit of a dud. There has been concern from some investors that the the proceeds of the offering -- some of which went to pay for costly transfer fees on some of its players -- would not help grow the club. Since bottoming out in September, though, the stock has risen above its IPO price.

Bull Case: Manchester United shares could benefit from sustained outperformance over the course of the British football season, which the club may be able to leverage into more lucrative sponsorships.

Bear Case: Risks to the stock cited by Deutsche Bank analysts include 'owners controlling 98.7% of voting rights, lack of direct comparables, unexpected player deals/salary inflation, team underperforming our expectations, timing of Nike deal, e-commerce/new media expansion and currency-related share volatility.'

Herbalife (HLF)

Sector: Electronics Retail

52 Week Stock Performance: -20.7 per cent

What's Going On: Herbalife shares plummeted in December when prominent hedge fund manager Bill Ackman announced he was short the stock and published a massive, 300+ slide presentation explaining his thesis. Shares have already recovered their losses -- helped by an announcement from another prominent hedgie, Dan Loeb, that he would take the other side of Ackman's bet.

Bull Case: Ackman, who reportedly commands most of the short interest in Herbalife, gets squeezed out of his position as more and more big investors take the other side of his bet.

Bear Case: Investors come around to Ackman's side of the argument that Herbalife is essentially a pyramid scheme.

Apple (AAPL)

Sector: Technology

52 Week Stock Performance: +15.9 per cent

What's Going On: Apple has for a while reigned as the largest company in the world by market capitalisation. However, shares of the market's favourite company have been subjected to a vicious selloff since September. Yesterday, though, famed market timer Tom DeMark said the bottom was in, and shares could rally 22 per cent from here.

Bull Case: The selloff has been overdone, and shares begin to rebound. iPhone sales data come in better than expected.

Bear Case: Apple is entering a new, post-Steve Jobs era wherein the company will not be able to innovate as it has in the past. iPhone sales data come in weaker than expected.

American Apparel (APP)

Sector: Retail

52 Week Stock Performance: +20.6 per cent

What's Going On: American Apparel has been under intense scrutiny as it saw losses mount in 2010 and 2011. Shares staged a rally in September before bottoming out in November, and since then, the trend has been up. Same-store sales figures are on the mend as well.

Bull Case: Same-store sales continue to improve.

Bear Case: Investors have been sceptical of CEO Dov Charney's ability to right the company for some time, especially after some unflattering litigation.

Research In Motion (RIMM)

Sector: Technology and Communication

52 Week Stock Performance: -10.0 per cent

What's Going On: Research In Motion has slipped over the past few years as popular smartphones like Apple's iPhone and mobile devices running on Google's Android operating system have completely invaded and taken over what used to be Blackberry's market. However, the company has a pretty clean balance sheet, and shares have rallied substantially since November.

Bull Case: The launch of the Blackberry 10 smartphone, slated for January 30, is wildly successful and RIM takes back some market share.

Bear Case: If the Blackberry 10 launch turns out to be a flop, investor sentiment could sour quickly.

JC Penney (JCP)

Sector: Retail

52 Week Stock Performance: -44.1 per cent

What's Going On: JC Penney investors thought they scored when the company hired Apple's retail guru, Ron Johnson, as CEO in late 2011. However, the bet hasn't paid off yet as the stock has languished, and same-store sales figures have disappointed.

Bull Case: JC Penney's new promotional strategies pay off for the company by driving more foot traffic to its stores.

Bear Case: New promotional strategies cut into margins and make certain vendors wary of continued business with JC Penney.

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