Our investing advice on 3 high-risk stocks

Members of our Inner Circle service often ask for investing advice on stocks they are thinking of buying that we don’t cover in our newsletters. A large number of these stocks fall into a grey area. Sometimes our investing advice is that they are “okay to hold,” but we wouldn’t advise buying them. When Inner Circle members ask about one of these companies, that’s what our investing advice would be: it’s “okay to hold.”

However, when Inner Circle members ask about companies we think they should sell (or avoid if they don’t already own them), we say so. Here are three recent examples of our Inner Circle investing advice:

Day4 Energy (symbol DFE on Toronto) designs and makes solar panels using its patented electrode technology and silicon cells.

Day4 believes that its technology converts sunlight into electricity more efficiently than existing technology.

The company has been severely hurt by the weak economy and falling prices for solar cells and panels. Its revenues have dropped, it is losing money, and it is reporting negative cash flow.

As well, advances in solar technology add considerably to the risk of solar-power companies that depend on a single technology. They constantly risk being overtaken by competitors with a superior product. Then too, the belief that new and improved technology is coming may lead customers to hold off on buying solar equipment.

Our investing advice: Day4’s solar-technology research looks promising, but it needs a rebound in solar-power technology prices to show a profit, and that’s far from certain. Meanwhile, the company depends on government subsidies. That’s especially risky for a junior like Day4, because it’s too small to maintain a significant lobbying effort. Day4 Energy is a sell.

Connacher Oil and Gas (symbol CLL on Toronto) is a Calgary-based oil and natural-gas exploration, development, production and refining company.

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Connacher’s main asset is a 100% interest in 98,000 acres of oil-sands leases near Fort McMurray, Alberta. These leases include the land occupied by Pod One, the company’s first 10,000-barrel-per-day oil-sands project. Algar, the company’s second 10,000-barrel-per-day oil-sands project, is now under construction. It’s expected to start up later this year.

Extracting oil from oil sands is hugely expensive. That cuts these projects’ profitability and adds to their risk when oil prices are low. Moreover, Connacher has built up significant long-term debt by investing in oil-sands projects: Its long-term debt of $889.1 million represents 167% of its market cap.

Our investing advice: The company has added some diversity through its refining and conventional-oil and natural-gas assets, but its high debt continues to saddle it with a lot of risk. It’s a sell.

Akamai Technologies Inc., (symbol AKAM on Nasdaq), helps companies improve the performance of their web sites. Its customers include Amazon.com, Adobe Systems, Apple, Microsoft and Yahoo. Akamai is a Hawaiian word meaning smart or intelligent.

Akamai mirrors a customer’s web site onto its own network of servers, which are located in over 70 countries. That speeds up download times and cuts the risk of Internet outages or slowdowns, because users can access the closest server, or the one with the best connection.

Demand for Akamai’s services continues to rise, particularly as more people use the Internet to view videos. The company gets 28% of its revenue from customers outside of the U.S.

The stock has recovered from its November 2008 low of $9.25 to its current $32.20. It now trades at 37.4 times the $0.86 a share that Akamai will likely earn in 2010.

Our investing advice: Akamai is a leader in its field, and should continue to attract high-quality customers. However, it is essentially in a service-bureau business, so it faces a steady stream of new competitors and downward pressure on its prices. As well, its high price-to-earnings ratio makes it vulnerable to a sharp drop if its earnings fail to meet expectations. Akamai is a sell.

If you have investment-related questions, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service. Click here to learn more.

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