My job is to help you build your wealth by leading you to companies that are changing the way we live and thrive. But I want to do more than that. I also want to keep you out of bad stocks – to both minimize your losses and help you invest your money instead in what I believe are the best opportunities the market has to offer.
To make sure you’re not holding any duds, I’ve pulled together the top 45 stocks that I recommend selling. Let’s get right to it!
Oil Losers
The entire energy sector – about 10% of the market by capitalization – has become a no-fly zone for many investors since last Thanksgiving when crude prices started their slide from $100 to barely $45 per barrel. While some will thrive in the current environment, others have taken on far too much leverage to keep their balance sheets liquid if the oil market doesn’t recover fast. Here are the top names that come to mind as being especially vulnerable:
Denbury Resources (DNR) sold enough oil last year to report earnings around $1 per share. With earnings forecasts now tracking at a 70% haircut, the current cash position of $0.10 per share won’t even cover the dividend, let alone make it any easier to manage $6.4 billion in debt and other liabilities. The balance sheet looked stable when the stated reserves in the ground were worth $9.7 billion. Once management has to write down value to match market price, the structure may not be sustainable without pain. Capital spending has already taken a 50% hit, severely restricting the growth profile here.
QEP Resources (QEP) is in a similar bind, forced to produce every barrel it can in order to cover $3 billion in debt. Assets are substantial, but the $2.5 billion midstream business has already been sold off – and who wants to sell at desperation prices in order to fend off a cash crunch? Drilling, well operation and transportation cost the company roughly $18 per barrel, which translates into a substantial drag on profitability. Margins will also take a huge hit so best to stay away.
Crestwood Midstream Partners (CMLP) is a good example of the impact of low oil prices spreading beyond the E&P companies throughout the energy sector. Hopes for an impressive 60% improvement in profitability have turned into a stark recognition that the company will report a loss for the next few quarters at least. Cash position has improved a lot, but with only $4.6 million to cover $255 million in current liabilities, it’s going to take a lot more than cost cuts to keep this ship afloat.
Seadrill (SDRL) shows why the superficially attractive dividend yields on many battered energy stocks are highly misleading. In theory, SDRL shows up on income screens for paying shareholders $4 in the last year. However, management has actually suspended all dividend payments in order to strengthen the balance sheet instead. The effective yield here is not 39%. It is zero.
EQT Corp. (EQT) gives us an even more extreme example of a nominally income-focused stock that actually fails to translate that focus into much current income. The yield here is barely 0.10%, and with the EPS trend going negative along with so many other names in the sector even that minimal yield is going to represent an increasing drain on the company’s finances.
Sinopec (SHI), China Petroleum (SNP) and PetroChina (PTR) get special attention here because if it weren’t for the guiding hand of Beijing, none of these gigantic companies would be in position to pay their financial obligations. PTR has $63 billion in liquid assets but is juggling $93 billion in current liabilities. Bracket a nebulous $281 billion in land and equipment and the long-term debt load would have already crushed a less strategic enterprise. SNP and SHI are in similar straits, with all three boasting quick ratios of 0.3 or worse. While these names are arguably too big to fail, they seem far too bloated to prosper.
ExxonMobil (XOM) takes us all the way to the top. This $360 billion behemoth is unlikely to go away any time soon, but it’s not exactly a bargain right now either. In the best of times, XOM justified a multiple of roughly 14X forward earnings. With earnings widely expected to go over a 50% cliff over the next 12 months, the implied P/E here doubles. Wall Street thinks cash flow might recover to 2014 levels in about three years. Until we see that happen, this stock may rise and fall, but the action will remain range bound – not exactly the instant return to peak performance its fans want to see.
Costly Consumers
The U.S. consumer remains fickle and weak spending has increased fears on the Street. With that in mind, I’ve listed a few names that are now looking vulnerable in the retail sector.
Michael Kors Holdings (KORS) reported solid results last year, but higher revenues came with lower margins attached. Gross margins are beginning to see the impact of markdowns taken in its retail stores, while higher inventories are actually getting even more sizable. For a retailer, that’s usually an ominous sign, portending that the merchandise mix just may not be attracting buyers – and that means more markdowns ahead. All this comes as the brand is expanding its core base globally, which may spell overreaching.
Lululemon Athletica‘s (LULU) founder sold half his stake last year in this athletic wear behemoth that has been beset by his own comments that its yoga pants are not suitable for some women, and that he himself has disapproved of some of management’s actions. The sale could be perceived as an admission that the company’s glory days are over. In the meantime, LULU has been looking beyond its core business for growth, moving into nonathletic apparel and kids’ clothes, too. Expansion means more spending, which will weigh on future earnings.
Children’s Place (PLCE) has more than 1,100 stores, but it faces a growing threat from online competitor Zulily (ZU) and I do not think the children’s clothing category is big enough for both of them to prosper. There’s pressure from both public and private companies, and ZU is seeking growth in the baby segment where Carter’s is the 800 lb. gorilla. PLCE management is looking to nearly double their operating margins to 10%, and this target may prove elusive on pricing pressure.
Coach (COH) is a classic case of a company trying to grow through widening its audience and in the process diluting its core brand. Coach used to be a standard-bearer of “affordable luxury” and classic chic styling. Recent seasonal launches have been both ostentatiously wild – cartoons, fur coats, platform shoes – and priced out of reach for many young singles. I can see the goal here, but simultaneously reaching for younger, trendier and richer shoppers while alienating your core audience is no way to succeed.
Marriott International (MAR) had a fantastic 2014, increasing 60% including dividends from start to finish. That’s quite the impressive trajectory, but now that we’re well into 2015, it’s clear that the shares have stalled. There’s already a lot of good news baked into the stock currently trading around 21X 2016 EPS estimates and a very high 18.1X EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization), and given the company’s high debt load, MAR is certainly vulnerable to an eventual rise in interest rates.
IPOs
Initial public offerings – IPOs for short – are one of those investment opportunities that get people talking. After all, the idea of getting in on the ground floor of a hot new company as it becomes publicly traded is pretty exciting!
Unfortunately, it usually doesn’t work that way. When a new IPO comes to market, only insiders can usually get their hands on the shares. Anxious investors who were locked out pour in the first day of trading, which sends the stock soaring. The insiders then make a quick exit, pocketing their hefty gain. Demand dries up and the stock price falls, leaving all those individual investors to hold the bag.
The key to buying the right IPO without falling victim to the vicious cycle is both doing extensive research before the company goes public and then watching the rhythm of how the stock trades. This is why I keep my eye on busted IPOs, as they can sometimes spell opportunity and allow investors to pick up shares at bargain prices.
However, some IPOs are broken for a reason, and I have three relatively recent IPOs I recommend you avoid.
King Digital (KING) rode the Candy Crush fad to Wall Street but now the once-popular game seems to have hit a wall. Revenue is declining and the analysts who cover the company are not looking for year-over-year growth to recover before 2017. In the meantime, the stock looks superficially cheap at 9.3X trailing earnings but with the fundamentals eroding, few institutional investors seem eager to consider KING a bargain. Wait for the numbers to start moving the right way again.
Fairway (FWM) soared 33% in its trading debut in 2013, but now trades leagues below its peak of $26.09.The stock plummeted last year on its CEO exit and weak operating performance, and the trends have been troubling ever since. Since it became a public entity, FWM has missed consensus in all but one quarter, often by a nerve-wracking 20% to 180%. Wall Street currently expects the red ink to continue through at least 2019. With more than $250 million in debt on the balance sheet, cash of around $40 million and no apparent end to the negative operating cash flow, Fairway has a tough road ahead as it navigates the ever-competitive fresh food space.
SFX Entertainment (SFXE) started well enough after going public in October 2013, but management’s antics and elusive profits in the electronic dance festival business soon alienated Wall Street. At this point, billionaire CEO Bob Sillerman has offered to pay $4.75 per share as he tries to take the company private again, but investors are unwilling to jump at the opportunity. Either way, SFXE seems unlikely to go anywhere in the immediate future.
Losers in the Gaming Industry
Casino gaming has become a huge industry throughout the world. The United States has grown from one casino in 1931 to over 1,000 today, with casino gambling legalized in 22 states, as well as on Native American lands in 15 other states. Ten states made it legal in the past 10 years alone, with one of them (Pennsylvania) becoming the second-largest casino destination in the country after Nevada.
While casino gaming is definitely a global industry, it’s not doing as well in the United States, as American consumers aren’t quite ready to part with the cash in their pockets. This in turn hurts stocks that rely on the U.S. gaming markets. Here are four you shouldn’t bet on.
Boyd Gaming (BYD) has heavy exposure to struggling U.S. gaming markets including Las Vegas, New Jersey and Illinois, but has no exposure to burgeoning international markets. This puts Boyd at the mercy of the American middle class consumer who also happens to be a casual gamer. Several states have expanded gaming, which of course means more casinos, which in turn means more competition, and for Boyd, less revenue per casino.
In the latest indication that high rollers are not rolling so high, Caesars Entertainment Corp. (CZR) is not expected to make money before this decade is out. Revenues are barely increasing 3% year-over-year, boosted by a rise in Nevada, but has still been tempered by an overall U.S. wide drop.
Wynn Resorts (WYNN) is not exactly a prize either. As gamblers stay away from the casino floor, the balance sheet remains about equally divided between assets and liabilities, leaving little room for equity. Cash is flowing here, just not fast enough to justify a run back to the heady $240 per share this stock commanded a few years ago.
Melco Crown (MPEL) proves that Las Vegas isn’t the only place confronting empty casino floors. Macau now seems eerily quiet and too heavily overbuilt to bear a slow season. MPEL is probably the name most associated with Macau and the Chinese casino industry. If conditions stagnate there, this stock will feel the pain.
Dot.com Bombs
Social media stocks can be both alluring and dangerous. There’s money to be made in translating apps and clicks into dollars and cents. But the fickleness of online consumers can be a curse: today’s hot portal, website, shopping destination or gaming portfolio can be tomorrow’s dot com implosion.
This is because investors become disenchanted with sky-high valuations on companies investing a lot to grow their top lines, with little to show for it in net income. Let’s take a look at two that have lost their edge and a full five more that look more interesting as takeover candidates than going concerns.
Yahoo (YHOO) is facing more competition from online behemoths Google (GOOGL) and Facebook (FB) as they are making inroads into YHOO’s digital display business. Management has said YHOO’s revenue from display advertising is taking a hit, and the company’s market share in the segment has also dropped. Though the company has been investing in its mobile business – and this is where growth in the longer term lies – that’s not been enough to offset competitive pressure.
Zynga (ZNGA) had a rough 2014, but there’s likely more pain ahead now that the original CEO Mark Pincus is back in the command chair. Rising net losses are a troubling sign even as the company loses daily active users. Expanding into buying marketing and sports licenses may be a decent strategy longer term, but there may not be enough breathing room for the company to realize that strategy amid these mounting operating pressures.
Demand Media (DMD) is reaching a do-or-die threshold in terms of strategy. Revenue is in free fall as changes in online media consumption spontaneously create new and viral competitors from day to day. Losses are stacking up; while the balance sheet reflects plenty of cash to operate for the foreseeable future, sooner or later the model will need to change or the enterprise will need to seek strategic alternatives. Should DMD puts itself on the auction block, it is questionable how big a premium could it earn from a bigger media company.
WebMD (WBMD) is in somewhat better shape as befits a true dot-com survivor from the first wave, but this only demonstrates management’s persistent realism and ability to tweak the web content model year after year. The big growth seems to be behind us for the next few years. Comps have begun to flatten, so those looking for a ride to the stratosphere may need to search elsewhere.
TrueCar (TRUE) is still fighting to report sustainable profits and Wall Street is steeled to see this company burn another $50 million before that happens. The balance sheet has twice that much cash right now, but everything here depends on the auto sales market holding up over the next few years. One bad multi-quarter stretch – or the emergence of a next-generation competitor – could be trouble.
Yelp (YELP) has hit the sweet spot in terms of scaling to profits, but the top-line trend looks more like a plateau forming than a mountain. I am a little worried about reports that the company’s business review process is under investigation. This is a reputation-driven business. If online shoppers’ trust in what they read on Yelp.com is shaken in any way, the golden age could end faster than anyone suspected.
TripAdvisor (TRIP) has been such a star on Wall Street that signs that it is hitting its own growth wall are even more disturbing. Any of the last companies we have mentioned can find a buyer willing to pay a few hundred million dollars to grab the assets. At $11 billion in market capitalization, TRIP is more likely to be the buyer simply because relatively few entities could absorb an acquisition this big. The pure online travel agencies would balk if one of their numbers grabbed this site for itself, so rule out Priceline (PCLN), Expedia (EXPE) or a smaller name putting that kind of deal together. At best, all they’d be doing is wrecking the fragile détente that makes TRIP work.
Not-So-Fresh Food Stocks
As much as I’d like us to, my family and I don’t sit down to a home cooked meal every night. Sometimes after a long day of researching stocks, it’s easier to grab a meal out. And while I do like the food, I’m not as big a fan of the stocks.
These casual dining disasters show that what works on the street does not necessarily work on the Street. By that I mean that concept food (like overstuffed sandwiches or cute mascots) may stoke investor appetites, but ultimately, it’s the appetites of the loyal foodies that matter. And although some companies, like Chipotle (CMG), have maintained their clientele, industry research firms have noted some pressure in fast/casual dining traffic. Plus, diners have been spending only slightly more when the do head out to eat. This is a macro trend that does not support the sky high valuations and expectations of investors jumping into the fray.
Keeping that in mind, I have three names in this sector that are unable to satisfy the type of food/restaurant stocks investors crave.
Potbelly (PBPB) may look more like the Crumbs implosion than the Chipotle Mexican explosion – at least its stock may, anyway. PBPB doubled on its first day as a publicly-traded company but has slid by more than 55% since then. While recent results have been moving in a better direction, growth through opening new stores is still not going to be an optimal strategy here. The stock has been fairly stagnant in 2015 and I don’t see it taking off any time soon.
El Pollo Loco (LOCO) had seemed poised to become another high flyer like Chipotle (yup, there’s that name again!), or at least excited investors had hoped. Now there’s concern that expanding much more beyond its current 400 store count may continue to drag on earnings. A spate of analyst initiations with lukewarm hold and neutral ratings didn’t help the situation. It would take a look to get the shares moving up again, which I don’t see happening anytime soon.
Noodles & Company (NDLS) is one of the “single concept” casual dining stocks that burned quicker than anything seen in the kitchen. Three of the last four quarters missed consensus, including its most recent quarter reported on May 5. NDLS reported a loss of $2.8 million when it had reported a profit in the same period the prior year. This shows how a single concept – in this case, noodles – may be a (temporary) hit for novel cuisine and curious palates, but a dud after a while. This stock is more of a fad, so I don’t see it moving on an upward trend.
Cruises About to Crash
I love traveling the world with my family on a cruise, but even I’ve been hesitant to hop aboard a ship after all the negative headlines surrounding cruises: ships running aground, crimes committed onboard, viral outbreaks – these are just a few of the incidents that can make investors forget that cruise companies promise a week (or more) of leisure.
Cruise stocks including Royal Caribbean (RCL) and especially Norwegian Cruise Lines (NCLH) could run aground on Caribbean pricing trends, which have been soft on increased capacity. These two companies have half or more of their total capacity tied to the region, and capacity is actually growing as new ships come online in the next few years. In an effort to blunt the impact of more capacity, and fill berths, RCL and NCLH could see some price cutting and promotional activity, even while food, payroll and other expenses may see upward pressure.
4 Deceiving Dividend Players
After the Federal Reserve ended its massive quantitative easing program (QE), dividend stocks have had to work harder to compete with the relatively low-risk interest income that Treasury paper and money market instruments provide. Put simply, the income floor is rising. Companies that cannot boost shareholder payouts to keep up need to find other ways to compete for capital, or else find themselves shunned by a market that once clamored for their shares.
In normal circumstances, utility stocks carry a slightly lower dividend yield than 10-year Treasury bonds and make up for it with the prospect of capital appreciation. Years of zero-rate policy at the Fed reversed that relationship, leaving utility yields by two full percentage points above the 10-year rate as recently as 2012. But while that spread was tempting three years ago, it has evidently peaked. As bond rates edge upward, utility companies may not be able to expand their earnings fast enough to keep up.
Investors now need to ask themselves not only whether current payouts are sustainable, but whether those dividends are still attractive enough to justify holding onto the shares. If, for example, a utility stock in your portfolio yields barely 1.1% and is already allocating more than 35% of its earnings to dividends, cut it loose unless there’s profound growth on the horizon to somehow create richer income streams. You’d be better served simply buying new bonds at auction.
MDU Resources Group (MDU) may be growing, but the rate is too slow to keep up with the Fed. The current yield is below what a 10-year Treasury bond pays, which is generally a signal that those looking for either outperformance or simply risk-adjusted income need to search elsewhere. Utility stocks heat up on Wall Street when the dividend yield is better than what investors can get elsewhere, not worse.
AES Corp. (AES) has been beaten down to the point where its dividend translates into a 3% yield, and yet with relatively slow growth it is hard to argue that shares are a bargain at this price. Management has already diverted 44% of all free cash flow to fuel the dividend, starving the company of the funds it needs to expand much less finance its $18 billion in long-term debt. But should demand for income stocks decline, the downside risk here looks serious.
ITC Holdings (ITC) presents a similar proposition: relatively low yield and not enough growth on the horizon to give investors a reason to hope for a more competitive income stream any time soon. The Utilities Select Sector SPDR (XLU) pays 3.2%. Until stocks like ITC can make a more compelling argument, it’s hard not to simply buy the index fund and earn almost double the quarterly cash.
Armour Residential REIT (ARR) currently pays an annualized dividend of 15% in monthly installments. Management has promised to keep the $0.04 per share checks coming through the end of the quarter, but after that the outlook gets a little precarious. Book value on the company’s portfolio of mortgage debt – its sole reason for existing as a commercial entity – has eroded 35% over the last 18 months, which has Wall Street wondering whether management is simply burning off inventory to keep shareholders at the table. Even then, the balance sheet is deteriorating faster than the dividend checks would indicate. With higher interest rates on the horizon, the deterioration could accelerate over the next few quarters.
4 Healthcare Stocks that Hurt
Hospital groups and laboratory service providers look a little vulnerable here, but there are names throughout the healthcare industry that will simply fail to make the cut on both criteria and look overvalued by historical standards. At best, these are stocks to hang onto without expanding your position. At worst, it’s time to put that money to work elsewhere.
C.R. Bard (BCR) is an interesting company, but there have been obstacles given the merger between rivals Medtronic (MDT) and Covidien (COV). The competition now has the upper hand and BCR’s profits will remain under pressure until it can find its own edge. As it is, this stock has barely been able to keep up with the group over the last year. I don’t see that situation changing anytime soon.
USMD Holdings (USMD) is much smaller but has a similar wall of macro negativity to climb. With scant coverage from institutional analysts, this company has been locked out of the biggest portfolios. Management can do heroic things here, but it will take time and real transformative news to turn the long-term chart around.
While the controversial Affordable Care Act (ACA) has enrolled millions of previously uninsured Americans, the additional business is unlikely to improve the investment proposition in the drug distribution channel. Cardinal Health (CAH) could feel the heat.
PDL BioPharma (PDLI) looks great on the surface, with royalties flowing in from several important drugs licensed to partners and an impressive 8.6% dividend yield. The problem here is that the patents that drive the biggest royalty stream have expired, leaving the dividend as it now stands running on fumes. Management is working hard to buy new patents to replenish the portfolio, but the programs tend to be earlier stage, so the road may get a little bumpy over the next few years.
5 Chinese Stocks You Don’t Want to Mess With
Let me wrap by talking a little bit about China. You’re probably well aware of the concerns, primarily that lower demand for China’s exports around the world and a weakening real estate market (after it reached bubble-like craziness) will continue to weigh on growth. Export demand will depend to a large extent on how much the U.S. economy continues to strengthen as well as Europe’s economic health, with several nations there dealing with sovereign debt problems.
While these concerns linger, it’s smart to be cautious about ADRs of Chinese companies trading on U.S. exchanges. Here are some I would avoid that look headed for a bumpy road for a little while.
Xinyuan Real Estate (XIN) is extremely volatile because it is a pure play on the Chinese construction industry, one of the most controversial topics in the global market. When investors are eager to get direct exposure to Chinese housing, they pile into XIN. But when the viral videos about ghost cities in the Gobi Desert start circulating, this stock deflates fast. Right now the trend still points down.
New Oriental Education & Technology Group (EDU) has followed a trajectory similar to U.S. private education companies, initially flourishing and then floundering once it became clear that Wall Street’s hopes for perpetual growth were not going to materialize quite so easily. And given the company’s difficult business environment, it is hard for the analysts watching the stock to forecast earnings. With near-term uncertainties ahead, including the continued shift of market demand away from large classes (which was EDU’s strength), I believe we’ll see bigger bumps on the road that aren’t worth riding out.
Suntech Power (STPFQ) delivers more than 25,000,000 photovoltaic panels to over a thousand customers in more than 80 countries. And while it used to trade on the New York Stock Exchange (NYSE), it was “de-listed” after the NYSE found that the company did not meet its criteria for continued listing because of the average closing price of the Company’s American Depositary Shares (or ADSs). The stock is now traded over-the-counter (OTC), but given the troubles the legal company has had, along with STPFQ’s poor fundamentals, your money would be better spent elsewhere. This is a great cautionary tale: if the accounting looks too good to believe, there’s usually a big surprise buried somewhere on the books.
Yingli Green Energy (YGE) designs, develops, manufacture, markets, sells, and installs photovoltaic products in the People’s Republic of China. Last year, the company also revised its shipment volumes downwards expecting lower solar panel demand worldwide. And given the company’s high debt management risk, disappointing return on equity, as well as poor profit margins, this is a low-priced stock to avoid.
E-Commerce China Dangdang (DANG) is a business-to-consumer e-commerce company in the People’s Republic of China. It primarily sells books, audio-visual products, periodicals, and more. Like a lot of e-commerce vendors around the world, the company has struggled to balance its explosive growth agenda with profitability. The rise of Alibaba (BABA) in the global market has drained capital away from this chart and I believe that the risks involved in investing in the company outweigh the potential upside.
Sincerely,
Hilary Kramer
Editor, Value Authority