Every January, the financial media spew their prognostications of stocks that look poised to outperform in the year to come. And that’s all well and good — but it gets a bit Pollyanna-ish for my tastes.
We wanted to take a different approach with this roundtable: Which stocks will be dead by 2020?
Whether due to a changing business environment, competitive hurdles or a shift in consumer whims, the future is dim indeed for these companies — and the stocks could very well be but a memory by the end of the decade.
Our advisers, contributors and staff weigh in on their picks. Read on:
Lights Out for Alcatel-Lucent
By Richard Band, Profitable Investing
Hope is one of the most beautiful of human emotions. It pulls us out of bed in the morning to greet the world. In the financial markets, though, hope can prevent investors from facing the truth.
You see this phenomenon day after day in the stock market’s “most actives” list.
Whether on the NYSE or Nasdaq, each session’s list of most heavily traded stocks includes a generous peppering of companies with share prices well below $5 (often $2 or less). These are stocks that investors — speculators, really — keep buying as cheap lottery tickets.
The hope is that some of these super-low-priced names will pay off big. The reality is that most won’t be in business by 2020.
I could point out a number of such doomed “cheapie” enterprises, but I’ll give you just one: Alcatel-Lucent (NYSE:ALU). Shares of the telecom-equipment maker have lost two-thirds of their value over the past 21 months. Simply put, Alcatel is falling behind major competitors in developing the next generation of wireless data gear.
Can ALU regain its edge? One key financial development says no.
In December, Alcatel announced plans to refinance 3.4 billion euro of its shorter-term debt (with an average coupon of 5.9%) for longer-term debt with an average coupon of 7.4%.
No healthy company in today’s world buys back lower-yielding debt in order to issue higher-yielding debt. This deal has an air of desperation about it.
Sell ALU if you’re unlucky enough to still own the stock.
At the time of publication, Band had no positions in the securities mentioned.
Google’s a Goner
By Charles Sizemore, The Sizemore Investment Letter
What I’m about to say may sound absurd or even offensive. But I think it is highly likely that Google (NASDAQ:GOOG) will have vanished by 2020 — or at the very least changed to such an extent as to make it unrecognizable to readers today.
I know, I know. Google is so integral to modern life that it is no just longer a company; it is also a verb. So, I can understand an instinctive belief in the permanence of Google.
But think back 15 years. Google didn’t invent the search engine. There were plenty of them around before Google came along: Yahoo! (NASDAQ:YHOO), Excite, Lycos and Alta Vista, to name a few. But Google buried them all in the blink of an eye because Google had a better mousetrap for parsing data. And yes, Google is still awfully good at it, all these years later.
Lest you think I’m an anti-Google crusader, I use Google on a daily basis for search, and it’s easily the website I visit most. I’m also an enthusiastic user of Gmail and happen to be addicted to my Android-powered smartphone. Yet Google’s dominance in all of these areas is tenuous at best. Let us consider:
- Virtually all of Google’s revenues come from online advertising. Given the rate of change in information technology and consumer electronics, I cannot consider that a stable revenue stream with long-term visibility. Furthermore, as online rival Facebook (NASDAQ:FB) is discovering, the shift of user eyeballs from their desktops to their phones and tablets has not been good for the advertising model.
- Email is still critical as a communications medium, particularly in business. But Microsoft (NASDAQ:MSFT) tends to dominate here, and consumers tend to communicate more via social media apps like Facebook and Twitter and via instant messaging. Email is so … passé. And again, Gmail is like the rest of Google’s offerings in that it depends on advertising.
- Android is the king of smartphone operating systems — for now. Yes, Android has roughly 75% of the smartphone market. But again, Google doesn’t sell Android; it gives it away in the hopes that it will coax users into its advertising-based ecosystem, and to a lesser extent into its paid app store. And the Play Store has been far less effective than Apple (NASDAQ:AAPL) in convincing users to actually fork over money for paid apps.
Meanwhile, high-end makers of Android phones — such as South Korea’s Samsung (PINK:SSNLF) — are launching Windows Phones in early 2013. It’s not hard to see why. If you’re Samsung, you don’t want to be completely dependent on one third-party operating system developer — particularly a flaky one like Google. It’s in Samsung’s best interest to have a competitive Windows platform to sell alongside their Android phones.
And let’s not forget Apple. Though Siri, first released on the iPhone 4S, is mostly just a toy right now, don’t put it past Apple to forge it into a Google-slayer. Right now, Siri actually defaults to Google as its default search engine, so it’s hard to make an argument that it’s a would-be competitor. To this I have two answers. First, it completely bypasses the ads that pay Google’s bills … another example of why Google really needs to consider a new revenue model. And second, how long will Apple be content sending traffic to a chief competitor?
And finally, Google has a big, red target on its chest from government regulators. The U.S. government and Google have largely made peace — for now — but the EU still has an ax to grind. Google is in the midst of a long, drawn-out investigation by the EU’s antitrust regulators that may erode its advertising model further.
Again, I use Google daily — and in fact used it extensively when writing this article. But if Google is to remain relevant by 2020, it will have to be a radically different company from the one we see today.
Sizemore Capital is long MSFT.
Game Over, GameStop
There’s no joy in writing this.
I love video games, and I love GameStop (NYSE:GME). Make all the social stereotypes you want about the gaming community, but GME’s store clerks come armed with both product knowledge and personal engagement — and that’s exactly the type of service that bricks-and-mortar retailers are going to need to ward off the e-commerce march.
But service won’t help GameStop if it runs out of things to sell.
Games are inevitably shifting to digital. That’s life. Facebook (NASDAQ:FB), Zynga (NASDAQ:ZNGA) and other gaming app makers, Steam and Xbox Live have been grooming us to not only play games online, but buy them online, too. Microsoft’s (NASDAQ:MSFT) to-be-revealed Xbox 720 reportedly still will have a disc drive (Blu-ray), though there are at least rumors about a “slim” disc-less model (read: you’d download everything).
It’s great for gamemakers, which get to cut out a more expensive middleman — physical retailers. Microsoft and Sony (NYSE:SNE) get a cut from their online platforms. Both parties enjoy the benefits from the continued rise of downloadable content such as special characters and extra levels. (GameStop itself is dabbling in digital sales, but that division has brought in $160 million so far in fiscal 2012 — a drop in the bucket compared to about $5.3 billion in overall revenues in that time.)
Nintendo’s (PINK:NTDOY) Wii U — the first major console release since 2006 — was supposed to help GameStop stop the bleeding this holiday season. It didn’t. The Wii U flopped — and that, combined with a handful of big new releases for the Xbox 360 and PS3, led to crappy holiday sales. GameStop’s next hope, the Xbox 720, evidently won’t be out until at least June, and Sony’s next console … who knows?
The company is hoping these new systems will boost physical sales for a few years. But that’ll be it. By the time ninth-gen consoles are set to launch, global broadband should be fast and widespread enough to support disc-less platforms … at that point, GameStop likely will be in (or starting) terminal decline.
At the time of publication, Woodley had no positions in the securities mentioned.
(Editor’s note: For more on the imminent demise of GME, read on…)
No Reset Button for GameStop
By Bryan Perry, Cash Machine
Video-game retailer GameStop’s (NYSE:GME) days are numbered. The causes are legion, but the result is the same: GME is going the way of the dodo.
First, one would expect holiday sales of a game retailer to be upbeat, with the release of a number of new game titles like Call of Duty: Black Ops II, Halo 4 and new game consoles like the Wii U. Not so. Sales for the holiday season fell 4.6% and the company said same-store sales will decline by 4%-7% going into 2013. Simply put, the industry is in a secular decline now as gamers adopt streaming. Those who are buying games are doing so from Amazon (NASDAQ:AMZN), the 800-pound game-over dominator.
It’s not that GameStop isn’t addressing the downloadable digital market. It is, but 70% of sales are still derived from new and used disc sales. In addition, game makers like Microsoft (NASDAQ:MSFT) and Electronic Arts (NASDAQ:EA) will likely shy away from paying a middleman to market new releases, preferring to sell directly to consumers.
Toss in the fresh new wave of anti-violence sentiment in video games following the Sandy Hook massacre, and the makings of a true casket company the likes of Blockbuster are in the offing.
Shares of GME may trade at $23 today, but by 2020 this company will be off the board.
At the time of publication, Perry had no positions in the securities mentioned.
Groupon’s Final Deal: 100% Off GRPN Shares
By Hilary Kramer, GameChangers
Stocks considered dead money can rise from the ashes, or they can stay dead. It’s tempting to think that companies generating a lot of buzz will be the ones to bounce back, but that’s not always the case. One much-hyped company that I see as dead money is Groupon (NASDAQ:GRPN).
Groupon is a deal-of-the-day website that features discounted gift certificates that can be redeemed at various stores and companies. Although their $10 deals will get customers through the door, the reduced prices cut into profit margins.
Since going public in 2011, Groupon’s stock has dropped more than 80%, and the company’s chances for survival grow smaller by the day. First, barriers to entry are low. It doesn’t take much for other businesses to get in on the action, and we’ve seen the king of online stores, Amazon (NASDAQ:AMZN), do just that.
In addition, the advertising game itself is changing as companies do more of their own targeted and interactive advertising in our always-connected digital world. I just recommended a company that has a unique software that helps businesses deploy targeted email and mobile advertising, including couponing. That’s where the future lies.
Groupon’s current business model isn’t sustainable. And this isn’t even the only daily deal company that’s failing. LivingSocial, which offers similar deals, recently laid off 9% of its global workforce.
Stay away from Groupon. It’s dead money that I don’t see it coming back to life anytime soon — if ever.
At the time of publication, Kramer had no positions in the securities mentioned.
Hewlett-Packard Is a Doddering Dinosaur
Hewlett-Packard (NYSE:HPQ) once held dominion over the technology landscape like dinosaurs once ruled the earth. But a meteor strike in the form of mobile computing has made the business of sticking commoditized computer components into plastic boxes a path to extinction.
As Josh Brown at The Reformed Broker put it so well:
“Every passing month, millions of children under the age of 10 are being handed a device that is a non-Wintel PC. Do you think this generation will buy a Hewlett-Packard anything? Will they go looking for an HP machine running Windows 12 when they’re in high school? Ridiculous.”
Indeed, sales of PC dropped 5% in the fourth quarter, according to market research firm Gartner, despite it being the all-important holiday shopping season and the debut of Microsoft’s (NASDAQ:MSFT) Windows 8 operating system.
Meanwhile, a long history of disastrous acquisitions — from Palm (now shuttered) to EDS ($11 billion write-off) to Autonomy ($8.8 billion write-off amid accusations of fraud) — have wasted precious capital and only served to set HPQ back in the most important growth areas of tech, like mobile, cloud and Big Data.
No wonder shares in the Dow component are off 36% in last 52 weeks, and 70% from a 10-year high hit less than two years ago.
Dell (NASDAQ:DELL) is reportedly thinking about going private. That might be the only exit strategy for HPQ at some point. Unless it can pull an IBM (NYSE:IBM), ditching the PC business to reinvent itself as a global “solutions” company, it’s not clear how HPQ has any future.
But when you consider that this is a company that can’t get critical acquisitions right on the most basic level (like not overpaying by, oh, $9 billion), turning HPQ into something completely different probably ain’t gonna happen.
It’s tough enough to turn an ocean liner quickly, even in smooth sailing. It’s damn near impossible after it’s hit the iceberg.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.
Pitney Bowes Is on a Rapidly Shrinking Island
Much as it might pain me personally to say this, I have grave doubts that Pitney Bowes (NYSE:PBI) will be around in 2020.
The field of postage meters and mailing equipment is a business that’s deteriorating rapidly. Physical mail volumes have been on the decline for at least the past decade, and at some point — and I suspect it’s within five years or so — we’ll be looking at getting virtually all bills and catalogs online.
Pitney Bowes holds an 80% market share in the mail-meter business, and its highest margins come from this unit … but it doesn’t matter if most revenue and margin comes out of a dying market, there simply isn’t anyplace else to take up the slack.
Of more critical concern, PBI’s margins on every level are headed in the same direction — down. According to data provided by FinViz, earnings per share over the past seven years is down more than 7%. And while EPS over the next five years is expected to drop only about 1%, there is little reason to believe the trend won’t be worse and any slippage is magnified.
PBI continues to pay a dividend of $1.52 per share a year, which represents an eye-popping 13% yield — and that’s the problem. That payout accounted for nearly 50% of net income. That’s simply not sustainable for the longer term, particularly considering the company is weighed down with an 800% debt-to-equity ratio and that pesky dwindling-revenue-and-profits scenario. Cut the dividend and you will get some savings, but you’ll also see an even lower share price as investors head for the exits.
And as Barron’s reports, Standard & Poor’s just dropped PBI from its vaunted “Dividend Aristocrats” list for falling below the market cap threshold.
The bottom is falling out of this one. I just can’t see the business case for PBI’s viability beyond 2020.
At the time of publication, Bastow had no positions in the securities mentioned … having sold his PBI stake for a loss in December 2012.
Sayonara, Pilgrim’s Pride
Attention all you chicken lovers! In the not-too-distant future, Pilgrim’s Pride (NASDAQ:PPC), formerly known as Pilgrim’s Pride, will cease to exist as an independent company.
Pulled from bankruptcy in September 2009 when Brazil’s JBS S.A. (PINK:JBSAY) purchased 67.3% of its stock for $800 million, the world’s biggest beef producer has increased its control position to 75.3% with an additional $117 million investment. Already sitting on an unrealized profit of $741 million, the Brazilian company is likely to purchase Pilgrim’s remaining outstanding shares through its JBS USA subsidiary and then take the merged entity public.
With the lion’s share of JBS S.A.’s revenues in the U.S., it makes sense to have a major listing here. The big question at this point is whether the Pilgrim’s name remains as the public company. JBS is well known in most parts of the world, so I’d say there’s more than a 50/50 chance that Pilgrim’s 26-year run as a public company is just about over. I’d be shocked if it didn’t happen in the next 12 to 24 months.
Any way you slice it, though, the deal goes down by 2020.
At the time of publication, Ashworth had no positions in the securities mentioned.
Lots of Static for RadioShack
By Tom Taulli, IPO Playbook
Any company that has “radio” in its name is a dinosaur. And this certainly applies to RadioShack (NYSE:RSH). It’s a good bet the stock will not live beyond 2013.
Over the years, the company has been struggling to find relevance. Most recently, mobile devices came to the fore. RadioShack struck deals to set up kiosks in retailers like Target (NYSE:TGT) and Walmart’s (NYSE:WMT) Sam’s Stores. Unfortunately, the deals turned out to be unprofitable and have been terminated.
RadioShack’s own chain of 4,700+ stores is also ailing. The properties are often in strip malls and have tiny footprints of only about 2,500 square feet. They also must compete against tough rivals, such as big-box retailers like Best Buy (NYSE:BBY). Of course, major carriers like AT&T (NYSE:T) and Verizon (NYSE:VZ) are also a factor. Oh, and we can’t forget a little company called Amazon (NASDAQ:AMZN).
While the mobile business continues to grow, the margins are getting squeezed. The major phone manufacturers such as Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) continue to extract better and better terms.
This trend has been horrible for RadioShack. In the latest quarter, revenues fell from $1.03 billion to $1 billion and comparable store sales were off by 1.6%. But gross profit margins fell from 43% to 36% during the past year. RadioShack blamed this on the “the mix of smartphones at a lower-margin rate.”
It’s true that RadioShack has $938 million in total liquidity, which includes $546 million in cash as well as $392 million in a credit line.
But as margins deteriorate — which seems inevitable — there will be more pressure on liquidity (in fact, the company has already been aggressively raising capital). It will also mean there will be fewer resources to transform the business model.
All in all, it is an extremely brutal environment for RadioShack. You can start the deathwatch now.
At the time of publication, Taulli had no positions in the securities mentioned.
By Jeff Reeves, Editor, InvestorPlace.com and The Slant
Sears Holdings (NASDAQ:SHLD) has been a dumpster fire for a while now, with something like 18 consecutive quarters of same-store sales declines. I simply didn’t understand how the company could turn around, and I don’t see this big-box store existing in a few years.
Yes, hedgie Eddie Lampert has deep pockets and now carte blanche as CEO. And yes, he is remarkably in-the-money according to a Bloomberg analysis; his cost basis is apparently around $16 a share for its SHLD stock. But to me that smacks of an incentive to stay on the same troubled road rather than a kick in the pants to truly fix Sears.
Losses are persistent and substantial despite cost-cutting. Since 2005, Lampert has helped Sears shutter more than 170 stores and fire more than 40,000 workers, but it hasn’t resulted in a penny of profits. Furthermore, all the merchandise at closed stores has provided a nice cash bump as inventories are liquidated.
Then there are the tarnished Craftsman tools and Kenmore appliance brands, aging storefronts, poor e-commerce and a shopping public that is reluctant at best to step foot in a Sears or Kmart, considering the alternatives.
Worst of all, Sears is dangerously close to “junk” debt designation, with a CCC+ rating from Standard & Poor’s. Granted, Sears got an upgrade last summer from “negative” to “stable,” but borrowing costs are still very steep. For instance, a recent bond auction included notes due October 2018 that yielded 6.625% even in this rock-bottom interest-rate environment. What will happen to Sears if it continues to bleed cash two or three years from now when interest rates rise and it has to pay much more to borrow?
Much has been made of Lampert’s love of Sears’ real estate holdings above any retail operations — and yes, substantial property holdings for the corporation could be cashed out for a substantial sum or spun out in a REIT if you believe some of the crazy chatter over the last two years.
But the bottom line is still the bottom line, and SHLD as a big-box retailer under the Kmart and Sears brand names may be doomed in the long-term.
At the time of publication, Reeves had no positions in the securities mentioned.