The Bigger They Are, the Harder They Fall
While every investor knows it’s important to make the right buys, making the right sells is equally important when it comes to protecting your nest egg. In fact, it may even be more important since the climb up is always bigger than the ride down. Let’s say you lose 20% of a $5,000 investment. Now you’re at $4,000 — meaning you’ll have to earn 25% to get back to square. Even worse is if you lose 50% to $2,500. Now you’ll have to “double” your money just to break even.
Conventional wisdom holds that it’s better to stick with a stock that has been beaten down and wait for it to bounce back. But sometimes it’s just not worth the wait. If your investment only rebounds a few percentage points while the rest of the market moves significantly higher, recording a loss on that position and moving on was the right move for your overall portfolio.
To help you pull the trigger and move on to greener pastures, here are seven big name stocks I recommend selling immediately. Of course, each investor has his or her own strategy – and a one-size fits all approach doesn’t always apply. For instance, income investors may not be too concerned that Walmart (NYSE: WMT) has underperformed if they find value in the 2.7% yield. And of course, swing traders should pay much closer attention to immediate headlines and market trends. Some of these picks may have a few good weeks ahead of them in the short-term though I am bearish on all across the next several months.
That said, for medium-term to long-term investors – folks who trade a few stocks a month and strive for long-term capital gains when possible – you would be wise to take a serious look at these seven holdings and consider selling now.
I am a loyal and regular patron of the Chipotle Mexican Grill (NASDAQ: CMG) in the Falls Grove shopping center down the street. But as an investor, I’m simply not buying this stock. Beef prices are rising tremendously, though CMG stock is up 60% since Oct. 1, and has seen little sign of stopping. The company has to see these inflationary trends into earnings eventually.
What’s more, a trailing P/E of 48 and forward P/E of 33 are astronomically rich when compared to competitors in all corners of the restaurant biz that are mostly the mid teens. The closest I could find was Wendy’s/Arby’s (NYSE: WEN) with a forward P/E of 22. We’ve seen this movie before with the mega-growth of cult franchises like Starbucks (NASDAQ: SBUX) and Krispy Kreme (NYSE: KKD) crashing to a halt that leaves stock owners holding the bag. Get out while the getting is good.
International retail giant Wal-Mart Stores (NYSE: WMT) has watched its stock price decline -6% since the end of January, and -2% over the past 12 months. By contrast, the S&P 500 is up about 2% and 10%, respectively, in those same periods. After seven straight quarters of same-store sales declines, it’s no surprise UBS cut Walmart from “Buy” to “Neutral” in February.
The company recently announced plans to revisit its low-price branding but in my book that’s as damning a fact as any you can find. Less than a year ago, newly minted president and CEO of the company’s U.S. operations, Bill Simon, demanded Walmart add up to 25% more items on the shelves and focus on product selection and quality instead of pricing. This move is quite the about-face that indicates trouble. Either the Walmart brand has finally been crippled by long-simmering angst and recent lawsuits, or the company has simply mismanaged itself into a very deep hole. Whatever the case, investors should steer clear.
Wal-Mart isn’t the only big box retailer that’s hurting. Chip chic merchant Target Stores (NYSE: TGT) is suffering big time, too. While Walmart at least can fall back on rock-bottom pricing, and recent news indicates it will, Target finds itself stuck between customers. It can’t compete with high end specialty retailers for quality housewares or clothing, and doesn’t want to embrace the race to the bottom necessary for the budget-conscious shopper.
TGT stock is off 16% so far in 2011, and downside momentum could continue after this week’s news that -store sales dropped 5.5% for March.
International oil and gas company BP PLC (NYSE: BP) is still off significantly from early 2010 levels before the Deepwater Horizon disaster in the Gulf. Though it has bounced back nicely from lows under $27 and recently broke its 200-day moving average, BP has “a high risk profile,” according to Standard & Poor’s and the recent sideways movement in the stock indicates Wall Street agrees.
Those who have held BP throughout the crisis have the opportunity to sell for a decent price and reinvest in a better performing oil stock now that oil is on the rise. Unfortunately, BP appears to have hit a ceiling and is just not keeping pace, underperforming the broader market so far in 2011 while other oil stocks are up double-digits. The company missed its February earnings target and could disappoint again in a few weeks, making matters worse.
Performance for Cisco Systems (NASDAQ: CSCO) has been bleak – a 14% decline year-to-date in 2011 and a 35% decline in the last 12 months. This would be hard enough to stomach if it wasn’t for the boom other tech stocks have seen. And I’m not just talking a performance boom, as exhibited by the 11% gains in the Nasdaq over the last 12 months, but also earnings and revenue growth of a significant amount.
Consider that Juniper Networks (NASDAQ: JNPR) reported that sales grew 26% in the fourth quarter, while competitor Cisco missed the mark in its last two quarterly reports. Many industry analysts think 2011 will be Juniper’s breakout year thanks to its focus on cloud computing – a trend that continues to steal from Cisco’s revenue stream and a field Cisco has so far failed to embrace successfully. The real death knell, though, is that late last year Cisco warned that sales to government customers were dropping off. It’s not without good reason that John Chambers has recently been talking about a shakeup. But unfortunately, it may be too little and too late for shareholders. Sell now and seek out other tech opportunities.
Japanese auto manufacturer Toyota Motor Corp. (NYSE: TM) had a rough 2010, shedding over 8% as the market tacked on almost 18%. Recall woes and general softness in the auto market took its toll. Now disaster has literally struck again at Toyota, with the recent tsunami and nuclear crisis in Japan severely affecting supply chains.
TM isn’t alone, with Citigroup analysts branding all Japanese automakers a sell in the wake of the earthquake. But Toyota’s tough 2010 coupled with a gloomy 2011 means very bad news for investors and signifies more hardship is to come.
I hate to be the one to break it to you if you’re not yet aware, but Sprint Nextel (NYSE: S) is the playground for options junkies and swing traders – not an investment for serious long-term or medium-term investors. The company hasn’t turned a profit since Q2 of 2007 for cripes sake, saw a less than 1% bump in revenue from 2009 to 2010. It’s on track for an equally unimpressive 2011, with a barely 1% uptick in sales forecast again.
On top of that, more than likely the telecom also-ran will have its No. 1 acquisition target swallowed whole when AT&T (NYSE: T) begs, borrows and steals its way through the red tape to win approval for its planned buyout of T-Mobile. If you want to play a quick updraft or short correction in Sprint, feel free. But anything with a horizon over a month or two is likely a waste of your time, your money and your brokerage fees. Sprint stock is still half of it’s 2008 valuation and off almost -80% from 2007 highs. If you’re not a quick-hit trader, sell Sprint now while it’s riding reasonably high and approaching $5 a share.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks or funds named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.