When a new year opens with a buying frenzy, as 2013 did, the momentum usually takes a number of weeks to wear off through a series of short-term pullbacks. These corrections serve to weed out individual stocks that will no longer participate fully in the market’s advance. As the indices work their way toward their ultimate peak, fewer and fewer names will come along for the ride.
It’s impossible to know, with perfect foresight, which stocks will fall by the wayside. One clue, however, is that tomorrow’s laggards are most likely already lagging today. To be more precise: Chances are, they’ve been lagging the indices for several months now.
Avoid These Has-Beens
With the market nearing a routine pause, now is a good time to comb through your portfolio and search for stocks that have failed in the past 18 to 24 months to make a new high for the post-2009 cycle. Some of these stocks to avoid include Alcatel Lucent (NYSE:ALU), Rite Aid (NYSE:RAD), Suntech Power (NYSE:STP) and Zynga (NASDAQ:ZNGA).
Once upon a time all were competitive in their industries. Today they aren’t. In many cases their product lines are obsolete, and speculators are trading these penny stocks like lottery tickets. People are buying them for a buck, two bucks a share, maybe three or four in some cases, hoping that maybe they’ll be able to double their money quickly.
Well, that in itself isn’t a good sign. When you have so much volume in these low-price, low-quality stocks, it tells you a lot of people are out there speculating, and eventually it’s going to come back to bite folks who are playing this game.
These pennies are gonna vanish. That means some are gonna go to zero — in fact, probably a majority of them. I’ll go out on a limb and say this: A majority of the stocks you see on the most-actives list trading for less than five bucks won’t be around within the next five to seven years.
A Less-Obvious Sell
Now, the stocks I just mentioned are ones that I wouldn’t recommend to anyone. But among stocks I have recommended in the past to my subscribers, I think now is the time to exit Niska Gas Storage Partners (NYSE:NKA) if you own it. NKA has recovered almost 45% from its 52-week low, set in February 2012.
However, the partnership units remain below their July 2012 peak — and management’s earnings guidance for the rest of fiscal 2013 (ends March 31) leads me to believe NKA will eventually cut its cash distribution by 25% to 35%.
Clear these laggards out of your attic. Selling today will give you some cash to redeploy on the next significant market dip.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.