In part 10 of this 2011 Performance mini-series, we examine the worst 5 performers in the NASDAQ100 index during 2011 and learn about what to look for when fishing for turnaround opportunities.

You can read about the top 5 performers in the NASDAQ 100 by reading part 9 of this 2011 Performance mini-series also published under the category of the same name.

Previous articles have included an overall key market comparison for UK and US and reviews of the UK FTSE 100, Dow Jones best and worst performers, FTSE 250 best and worst and FTSE Smallcap best and worst performers too.

Future articles still to come include reviews of best and worst performers in the UK’s AIM Index where you can find out about the share that rose 1450% during 2011.  Wow!

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The first thing to notice about this list is that the worst five performers include two more retailers and two more telecomms related companies.

Our previous post on the NASDAQ top performers included two retailers and I said in that post that those retailers were focused on the value end of the customer base with a clearly defined product niche.

It will be interesting to see how this contrasts with the two poor performers in this list.

My Dow Jones worst performers review also included two telecomms related companies so it is perhaps no surprise to see two more in this NASDAQ list also.

It will be interesting to see what their problems are and what their future holds.

Of course, when fishing for shares at the bottom of the pile like this, we are hoping to find a company in a turnaround situation that is over the worst of its problems and ready to bounce back with the forthcoming good news not yet reflected in the share price.

Getting in early for shares like these can be a great source of profits, but not if you pounce too early.

That’s what I did with my purchase of shares in Game Group which I mentioned in this post.

It’s not easy to get the timing right and you will make some mistakes from time to time like I do, but the aim is to get it right more often than you get it wrong and to run your gains when you get it right but get out quick when you get it wrong.

Anyway, enough with the theory, let’s get our fishing rod out!

Research In Motion (RIMM) Down 75.1%

This Canadian company is famous for its Blackberry mobile smartphones and has recently released the first in a new line of products to rival the iPad.

The Playbook, as it is called, was launched in April 2011 and probably lies at the heart of RIM’s problems in 2011 as well as increasingly fierce competition in its core smartphone market.

RIM shares peaked at $147.55 in June 2008 but had fallen 91.5% to $12.52 before bouncing to $14.50 at the end of 2011.

To my mind, the Playbook is a diversification away from RIM’s core market and this is always a big risk.

Whilst the management’s intention is to lower the risk of the whole company, it usually achieves the opposite in the short to medium term at least.

That’s because the management team takes it eyes off the core product and focusses its attention on the new product – a bit like having your second baby and your first born thinks you have stopped loving them!

At best, the management team’s mind, time and attention is being spread two ways which is not necessarily the best thing to do when your core market is under increasing pressure from the likes of Android, iPhone, etc.

Also, if you are going to diversify, find something you can win at rather than entering another highly competitive battle like the iPad tablets, Galaxy tabs, etc.

Luckily, Blackberry invented the smartphone and push email idea and is still the market leading brand in USA, Canada, UK and Latin America in 2010.

But the gap is closing!

Early signs do not look good for the saviour – the Playbook – with disappointing initial sales and reported write-down of inventory (what did I say about competition?)

As for the shares, on a Price Earnings ratio of 2.65 times current earnings and a Price To Book Value of less than one, they look cheap.

But after several profits warnings in 2011, I would expect the latest earnings figures due soon to show a fall and thus an increase in PE ratio.

The PBV will also be affected adversely by the inventory write-down of Playbooks.

So these shares are not quite as cheap as they at first appear and there is no guarantee that RIM will come out of this battle on the winning side – just look at what’s happened to Nokia.

Although these shares are tempting, my feeling is that it is too early to dive in.  You may disagree?

First Solar (FSLR) Down 74.1%

This company is a manufacturer of photovoltaic (PV) systems and components for solar power systems.

Like it’s UK counterpart reviewed here, it has had a bad year for similar reasons.

The industry is suffering from short to medium-term over-capacity with subsequent falls in selling prices.

Until that situation changes, I can’t see any reason to buy these shares.

They are best avoided until signs of market improvement can be seen.

Netflix (NFLX) Down 60.1%

This company is best described as a provider of internet film and TV services.

It has grown out of a previous generation DVD rental service (hence a retailer).

The story is similar to RIM, in that its first generation DVD rental service has been declining as more modern internet video streaming services become available.

Netflix was a very early entrant, if not the first entrant, into this new market and priced its service very low as it basically “gave away” the internet TV service for free to its existing DVD customers.

Shares had begun the year by rocketing from $175.7 to $298.73 before the company announced a price increase of 60% for its customers wanting both DVD and Internet services!

Not surprisingly, customers voted with their feet and left to join the increasing number of rivals as Netflix admitted that its prices were too low to sustain.

Netflix responded with a profits warning with its 3rd Quarter results and the shares divebombed to a low of $63.86 before finishing 2011 at $69.29.  Oops!

Netflix has also suffered from losing the rights to distribute certain film content, e.g. Disney films and Sony films, in some geographic markets.

This highlights the dependency that Netflix has on content providers to support its business model.

Clearly, Netflix is having teething problems with its entry into this new internet TV market and that’s not the best time to be expanding fast into new markets like the UK as it is now doing.

The UK has its own dominant players in the form of BSkyB and Amazon’s Lovefilm brands established in related subscription TV and DVD film rental areas respectively, both of which are threatened by the disruptive technology of Netflix.

Not surprisingly both have already announced that they will be countering with a strong competitive response.

BSkyB and Amazon are big businesses with deeper pockets than Netflix and a lot to lose if the young upstart succeeds.

They will both be looking to give Netflix a business “slap” at a time when Netflix is already losing money and vulnerable – a bit of an achilles heel here?

My business brain tells me that companies should expand when they have a solid, proven business model and can conquer new geographic markets from a strong position.

Does this sound like Netflix to you, or are they expanding fast because they think they have to get there first?

Being the first to enter a market is not necessarily the way to win in the long run – anyone old enough to remember Sony Betamax?

There is no doubt that internet TV is going to be huge in the near future and there is an investment proposition here somewhere.

The question here though is whether Netflix is the company to back.  I’m not so sure.

Even at their current low price, Netflix shares look expensive trading on a Price Earnings ratio of 42 times current earnings.

I think these shares are best avoided for now but I would put them on your watch list to buy at half this price, if they get that low.

Sears Holdings (SHLD) Down 56.9%

Sears is a household name in the retail world whose shares were at $193 in April 2007 but, after another bad year, ended 2011 at only $31.78.

Sears is a broadline retailer operating in the mid-market and is therefore the opposite of the Ross and Dollar Tree formats I spoke about last time.

Without a clear reason for customers to buy from Sears, their customers are going elsewhere where they can buy it cheaper and more clearly defined.

Sears are downsizing, closing stores, selling off obsolete inventory and cost cutting but probably doing this too slowly, as management teams tend to do in situations like these as they hope things will improve soon.

Unfortunately, they rarely do in situations like these until all the bad news is out along with the management!

A new CEO, and big strategic review have happened in 2011 for Sears.

The terrible set of results with all the bad stock, site closures and debts cleared out in one go are expected next, in February 2012.

These are the things to look for in situations like these and news of that sort will trigger the time to buy, after the price has crashed to an all-time low, which is sure to happen if the results are as bad as they need to be for re-birth of the shares to start.

If the results are bad but not too bad then we can expect the share price underperformance to continue while the new management team comes to terms with reality.

After which, a second set of bad results will be announced containing all the bad news and clear-outs that should have been in the first set of bad results but weren’t.

Which of these two scenarios we are in is yet to be seen but we don’t have long to wait.

The first set of results from the new CEO are due later in February 2012 so we just need to be patient.

Recent news reported financial health worries for the company too and so, with these shares trading on a price earnings ratio of 35 times, I will be avoiding them for the time being.

The Price to Book Value is low at 0.54 times but that probably reflects news yet to come as more inventory is written off, which will of course push up that PBV closer to 1.

Just bide your time…”softly, softly catchy monkey!”

NII Holdings (NIHD) Down 52.3%

Last but not least, we come to a provider of integrated mobile communications services which operates in Mexico, Brazil, Argentina, Peru and Chile.

It’s shares peaked in July 2007 at $90.23 but had fallen to $21.3 by the end of 2011.

Recent results have all led to drops in the share price so this company is obviously suffering from poor trading currently.

However, it is continuing to expand and its shares are reasonably priced on a PE of 11 times current earnings and PBV of 1.15 times.

That said, I still couldn’t find anything to “set my pants on fire” either as this just seems to be a me-too provider of mobile services operating in markets that the big boys are not that interested in currently.

That may be a bit harsh but investment is about picking the best winners, not about being kind to also-rans.

Again, you may feel differently but I just think there are better investment opportunities to be had and that’s where to put our hard-earned cash!

That completes my analysis of the NASDAQ 100 stock market performance in 2011.

I had a few nibbles on my fishing line but no real takers this time!

I’ll be getting my fishing rod out again next week for the last two articles in this series.

I will be reviewing the UK AIM Index where the top performer rose 1450% during 2011.  I feel the need to say it again – WOW!!!

If you want to know which company this is, then you need to check back here next Monday to read my blog post.

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Otherwise, just leave me a comment below with your views.

Until next time then,

Adrian