The markets have been a bit of a mixed bag halfway through 2012, but the good news is, the major indices have eked out some gains, with the Dow Jones up more than 2% and the S&P 500 up a healthy 5%.
Then there’s that other news.
For most of 2012’s second quarter, Greece, Spain, Italy — you name it — have all done their part to shake investor confidence as they struggle to solve debt problems, China hasn’t been quite as “growthy” as we’d like, and the good ol’ USA remains on a shaky road to recovery. So those aforementioned indices are up, but healthy cuts of 5% to 6% over the past few months have really taken the sheen off the early-year rally.
This list takes a look at some of the companies hurting the most at 2012’s midway point — namely, the five worst Dow Jones Industrial Average components, and the five worst in the S&P 500. And there’s no particular flavor — the biggest losers across the market have come from a number of sectors.
Here’s the list:
#5 Worst Dow Stock: Cisco
Enterprise technology giant Cisco (NASDAQ:CSCO) has been struggling since 2011 when longtime CEO John Chambers announced a stark restructuring that resulted in thousands of layoffs, the shutdown of many consumer products and the announcement of the first-ever Cisco dividend.
Too bad those moves have failed to yield success. The stock slumped about 10% in 2011 and is tracking similarly poor performance in 2012.
Most recently, Cisco shares were slammed in May after the tech giant posted a poor fiscal Q4 outlook. Cisco blamed the broader economic environment as the source of its troubles, with uncertainty in Europe weighing on businesses when they decide to upgrade their technology equipment.
That might be fair. Top competitor Juniper Networks (NYSE:JNPR) is hurting even more than Cisco this year, with an ugly 24% decline despite broader strength in the tech sector. But it doesn’t make shareholders feel any better about this laggard’s performance.
#4 Worst Dow Stock: Procter & Gamble
Sector: Consumer Staples
Much like McDonald’s, Procter & Gamble (NYSE:PG) has suffered from a general rotation out of some of the more defensive sectors — utilities, consumer staples and the like — after these stocks ran up in 2011. But the story of P&G’s declines also has to do with other factors creating specific headwinds for this company alone.
In its fiscal third quarter, revenue declined slightly. In both Q2 and Q3, earnings per share were down year-over-year. This quarter, many analysts are expecting a slide in one or both of these metrics again when P&G reports earnings July 30.
To be clear, it’s not like Procter & Gamble is at any risk of fading away. It is a dominant consumer products giant with brands that include Bounty paper towels, Duracell batteries and Gillette shaving razors. But while this sleepy stock was in favor last year because of its stability, recent earnings stumbles have prompted some investors to move their money despite the nice 3.8% yield.
#3 Worst Dow Stock: Caterpillar
In 2011, Caterpillar (NYSE:CAT) posted lackluster losses of 5% compared with 5% gains for the broader Dow Jones Industrial Average. And so far in 2012, CAT is one of the Dow’s worst performers.
The move makes sense at a casual glance — after all, Caterpillar makes heavy machinery for construction and mining. It’s not like there’s booming demand for commercial structures or big spending on infrastructure projects amid debt debates in Washington. As for mining, the low prices for copper and other base metals amid the economic downturn shows that demand just isn’t there.
This is apparently what investors are thinking, and why CAT stock has been held back. However, consider that Caterpillar’s revenue has soared from $32 billion in fiscal 2009 to more than $60 billion in 2011 — with projections of over $70 billion in 2012! Earnings per share also have soared, from a mere $1.43 in 2009 to $7.40 last year and projections of $9.75 in 2012.
Caterpillar might be down, but there’s a reason why Dan Burrows has named this pick his Best Stock to Buy in 2012. This pullback could be a nice buying opportunity.
#2 Worst Dow Stock: McDonald’s
Sector: Consumer Discretionary
Unlike HP, I actually have a lot of respect for the leadership at McDonald’s (NYSE:MCD). CEO Jim Skinner is one of the best CEOs in the Dow, and has been with Mickey D’s since 1971 in various capacities. Since he took over the corner office in 2004, the stock is up more than 260% — compared with a mere 21% gain in the market!
But McDonald’s simply outkicked its coverage in 2012, in my opinion. After being the best performer in the Dow Jones Industrial Average for calendar year 2011 with returns of about 29%, Wall Street was worried. Investors loved McDonald’s ability to continue to grow its already impressive earnings and heap on the dividends (currently a yield of about 3.2%) … and the MCD trade became a very crowded one.
In the first half of the year, as riskier bets like financials and technology came into favor, the money left McDonald’s stock. That has held back shares in the short term — but if past is precedent, the fast-food giant will fight back sometime soon.
#1 Worst Dow Stock: Hewlett-Packard
YTD Loss: -25%
Oh, where do I begin on Hewlett-Packard (NYSE:HPQ)? My post from 2011 about how HP embodies the worst of corporate America? My teardown of why the latest HP turnaround is just as doomed as previous efforts? Why CEO Meg Whitman is incapable of fixing this company? It’s hard to pick …
At any rate, it should be obvious to anyone who has watched the antics at this company lately that HPQ is one of the worst performers on Wall Street. The revolving door in the corner office over the last few years, the serial acquisitions and now another round of “restructuring” — are you surprised this stock has suffered?
Throw in the end of the PC era, the crowded enterprise technology space and general economic woes, and it’s no wonder that Hewlett-Packard stock is setting new 52-week lows every week, and currently challenging lows not seen since 2004.
And in case you think this is just a short-term trend: HPQ is off 56% in the past five years and 45% in the past 12 months.
#5 Worst S&P Stock: Abercrombie & Fitch
Sector: Consumer discretionary
Shares in Abercrombie & Fitch (NYSE:ANF) have struggled mightily since 2011. After crashing during the recession, ANF stock fought back to almost 2008 levels briefly last summer … before dropping more than 50% to current valuations.
The biggest pain has come quite recently. Shares of Abercrombie tumbled just a few weeks ago on news that the struggling retailer would close yet more stores in an effort to boost profitability. Its cash hoard was more than $700 million a year ago, but is almost nothing now thanks to restructuring costs.
The story with ANF mirrors the troubles of fellow S&P 500 laggard Electronic Arts (NASDAQ:EA) in that the world of youth fashion is fickle and competition is fierce. There’s also the high unemployment among its young adult customer base.
Earnings are set to slip in fiscal 2012, and investors aren’t confident that the cost-cutting is enough to make Abercrombie & Fitch attractive again. The result is a race for the exit in this retail stock.
#4 Worst S&P Stock: Allegheny Technologies
Allegheny Technologies Incorporated (NYSE:ATI) is a small-cap specialty metals producer worth about $3 billion. The company’s products include titanium and specialty steel alloys, among other things, used in a wide array of high-tech capacities that include jet engines.
It goes without saying that the recession wasn’t kind to materials stocks like Allegheny. Demand fell off a cliff as sales of durable goods and machinery dried up. There was a resurgence in shares across 2010 and 2011 on hopes of a recovery, but recent troubles in Europe and fears of a double-dip at home have battered this stock.
Fundamentally, ATI isn’t all that bad these days. It has seen nine straight quarters of year-over-year revenue increases and is tracking a nearly 50% jump in earnings per share for fiscal 2012 over fiscal 2011.
But materials stocks just can’t catch a break right now, whether they be big players like Alcoa (NYSE:AA) or smaller fish like ATI. These companies are cyclical and driven by broad demand trends, and investors just aren’t confident that demand will be there amid global economic troubles.
#3 Worst S&P Stock: Electronic Arts
Sector: Consumer Discretionary
Video game icon Electronic Arts (NASDAQ:EA) is caught in an untenable position this year. On one side, consumer spending continues to be battered by high unemployment — particularly among the younger folks that make up the majority of gamers. On the other is the mobile revolution as games move beyond consoles and hard copies, increasing the competition and eroding the dominance of Electronic Arts in the space.
The strange thing is that EA’s numbers still are strong. The company has seen five straight quarters of year-over-year earnings growth, and after some unprofitable years amid the Great Recession, its earnings have bounced back strongly.
Unfortunately, investors aren’t all that concerned with the present. It’s the fear of the future that has them worried about Electronic Arts. Shares are off 75% since pre-Lehman levels and have struggled to make any headway even since the company returned to profitability in 2011.
#2 Worst S&P Stock: First Solar
First Solar (NASDAQ:FSLR) has a similar tale to tell as the S&P’s worst stock in 2012 (we’ll get to that in a minute). There just isn’t as much demand for energy in a weak economy, and there are just too many cheaper alternatives.
The problem with solar is that it remains expensive on the front end via installation of solar panels. In good times, many governments were subsidizing these solar panels via tax breaks — with Europe being one of the prime markets for companies like First Solar.
Now that crude oil has slumped to around $80 a barrel and natural gas remains super-cheap, and now that some eurozone governments are worrying about paying the electric bills let alone paying for solar subsidies … well, it’s lights out for FSLR.
First Solar has missed earnings expectations for four straight quarters, including a surprise loss in Q1 2012 after a 12% drop in revenue. Shares have responded in kind.
#1 Worst S&P Stock: Alpha Natural Resources
If you want to find the sector hardest hit in 2012, look no further than the coal industry. Alpha Natural Resources (NYSE:ANR) is one of the top suppliers of metallurgical coal for steel-making and thermal coal to electric utilities, and is the poster child for trouble among its peers.
For starters, the soft economy has created soft demand for steel. That means less metallurgical coal is needed — especially since base metal prices are painfully low, and steel producers need to be cautious about ramping up production too fast and thus glutting the market and driving prices even lower. Secondly, a soft economy means weaker energy demand even in markets like China that typically devour coal. Thirdly, where there is energy demand, an excess of cheap natural gas is more attractive to utilities because of its cleaner nature (sorry “clean coal” PR workers).
The result has been an obliteration of coal stocks. ANR is down 60%, but it’s hardly alone. Arch Coal (NYSE:ACI) is off by about the same amount this year, and the much smaller Patriot Coal (NYSE:PCX) is off by even more.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.