Published August 1, 2011

MarketWatch

BOSTON — Harley-Davidson Inc. shares roared and shot forward like one of the company’s famed motorcycles this week when the company reported that first-quarter profits hadn’t fallen as much as expected.

Whenever a big brand-name stock makes headlines with a jump, and looks like it is poised for a solid future, average investors start getting interested.

But in a case like Harley-Davidson Inc. (HOG). the news that popped the stock also took a lot of potential gains off the board, changing the value proposition and turning the security into the Stupid Investment of the Week.

Stupid Investment of the Week highlights the concerns and conditions that make a security less than ideal for the average investor, and is written in the hope that showcasing the potholes in one situation will make it easier to avoid nasty bumps elsewhere.

While obviously not a purchase recommendation, neither is the column intended as an automatic sell signal; that’s particularly true with Harley-Davidson, where current investors have an easy case for hanging on and hoping the company moves above its fair-value estimates. In fact, despite its issues, there would be a buying case to be made for HOG if only the shares were trading at about 40% below their current level.

Born to be mild

But Harley’s recent revving of its engines was enough to ensure that buyers now face significantly more downside potential than upside growth.

People who see the news and want to buy Harley-Davidson now are late to the party, said Brent Wilsey of Wilsey Asset Management in San Diego, Calif. This is a case where maybe you don’t want to make too much of an earnings surprise. Yes, they had some good news this week, but the news here is not all good.

Harley-Davidson, of course, is the world’s largest manufacturer of heavyweight motorcycles, controlling roughly half of the domestic sales and one-third of the global market. The company has tremendous brand loyalty, and is known as a favorite of investment legend Warren Buffett. Plenty of investors will follow Buffett into almost any stock, but they should put the brakes on Harley, where Buffett gave the company a $300 million lifeline 14 months ago. The motorcycle maker is locked into paying Buffett’s Berkshire Hathaway (BRK.A) an annual interest rate of 15% per year; a buyer of Harley stock isn’t getting that kind of sweet deal.

Harley needed the buyout because the company’s finance arm collapsed during the credit crisis of late 2008. When the market bottomed out, Harley stock turned a corner and started to accelerate; not surprisingly, the valuations were good.

A year later, and the company’s earnings surprise pushes the shares up by about 10%; that means the price has doubled in a year. For an average investor, looking at a brand-name stock they plan to buy and hold, the purchase point is more important than many investors give it credit for. Plenty of buy-and-holders believe that a week or two worth of price action is no big deal when considering a stock they plan to own for three or more years.

Price point is always important, said Mark Coffelt, manager of the Empiric Core Equity Fund (EMCAX). Even over a three-year holding period, a 10% difference implies a 3% per year difference, which is the difference between average and great.

Skid marks

At this price point, Harley looks worse than average.

The company cut its dividend late in 2009, and didn’t add so much as a penny back during the market’s rebound. While first-quarter profits didn’t fall as much as Wall Street expected, year-over-year sales and earnings were off sharply. It’s no surprise, given the Buffett deal, that total debt is climbing, and that the debt-to-equity ratio now stands at 336%, a number that should spook the typical buy-and-holder.

In fact, if you didn’t know that the profit number was better than Wall Street expected, you would have thought the earnings news was all bad.

Harley CEO Keith Wandell was particularly cautious during the earnings announcement. Given the global economic uncertainty that still exists, we believe conditions will remain challenging throughout this year, Wandell said, and we will continue to factor that into how we manage the business.

Given the clouds that have dogged the company, it’s entirely possible that the pop after the news was caused by short-sellers covering their positions. There’s no real indication that institutional investors are jumping in at this point.

Wilsey noted that earnings estimate for the company stand at $1.91 per share for 2011, up a hair on the good news. Three months ago, however, the same consensus estimate was $1.92 per share, but the company’s share price was roughly 30% less than current levels.

That’s another sign that Harley is more likely to roll downhill than kick it into a higher gear.

Harley may be a cult brand, with incredible user loyalty, but heavy bikes are still a niche market, and one that isn’t likely to grow much until economic recovery is far more robust. Good headlines and good news, in this case, don’t make for a good price point; investors will find a faster, smoother ride somewhere else.

+ Follow Fox Business on Facebook