by James Brumley | June 10, 2013 3:22 pm
Despite the marketwide stumble of about a week-and-a-half ago, 2013 has been a very good year for some high-profile companies. In fact, for a few of these stocks, this year has been a little too good, taking these tickers to multiyear (if not all-time) highs … and leaving them vulnerable to sharp pullbacks in the very near future.
Here are the four of these high-fliers that are most likely to tumble:
The theory that drives cereal makers’ (and other grain-intensive) stocks higher and lower isn’t a complicated one. If wheat and corn prices fall, that makes input prices cheap for these companies. If commodity prices rise, it’s tougher for cereal-makers to make a buck.
Care to guess what was happening when Kellogg (K) began what would ultimately be a 40% rally back in August of last year? Wheat prices were plunging, from a peak of $9.44 per bushel then to a low of around $6.80 by April of this year. Point being, the big rally from the stock made sense.
There was something very different with this rally, however, than we’d seen with prior rallies spurred by falling commodity prices. This one was far more exaggerated than any of the prior ones. Ergo, the potential pullback could be equally large. Worse, the fact that wheat prices have stopped falling at a known support line suggests now might be the time for things to unravel.
While General Mills (GIS) and Flowers Foods (FLO) are two more wheat-centric names that have rallied in sync with wheat’s demise, Kellogg shares are the most overbought.
If the fact that PepsiCo (PEP) shares hit all-time highs just four weeks ago is any clue, it’s clear the market is thinking bullishly about the stock.
When you look at the company’s bottom line growth (or lack thereof) for the last few years, however, one has to wonder what these buyers are getting excited about. Annual per-share profits rolled in at an $4.40 in 2011, fell to $4.10 in 2012, and are only expected to reach $4.40 again this year. The sales picture and outlook roughly mirrors the earnings trend. They’re not necessarily poor results, but they don’t exactly justify the stock’s 20% gain for the year.
Those investors familiar with PepsiCo will know the company is looking for big things from China this year and next. But, China’s not exactly the star any company wants to hitch its wagon to right now. There’s also something a little unnerving about a stock that trades at 17.2 times its forward-looking earnings, but is only apt to grow its income by 7.3% this year (and only by 8.6% next year).
This will undoubtedly be the most controversial call of all the in-jeopardy names under the microscope today, but after a 27% run-up for the year so far, Berkshire Hathaway (BRK.B) might be about to surprise may of this year’s buyers — in a bad way.
It’s not a pessimism based on any fundamentals, because … well, there are no fundamentals to be dissected. Half of the companies held by the entity aren’t publicly traded, and are valued by accountants (paid by Berkshire) rather than valued by the market. Point being, the price of a share BRK.B is by and large a best-guess from the market … which means emotion and assumption can significantly dictate how it trades, and momentum begets momentum.
All well and good, but when the momentum music stops, even the best of equities can come unraveled. In other words, a correction for Berkshire might be in the near-term cards, if only because there’s so much pent-up profit-taking potential on the table, and the bulls should be getting tired about right now.
For an industry that’s supposed to be in the midst of falling off a patent cliff, a surprising number of pharmaceutical stocks have done very well this year. Gilead Sciences (GILD) shares are up 44% for 2013 so far. Bristol-Myers Squibb (BMY) has gained 45% year-to-date. Johnson & Johnson (JNJ) is up 21% since the end of last year.
That’s great for current owners, but not one of these names has the most compelling trailing or projected earnings situation. Johnson & Johnson will do well to grow earnings at a pace of 3% for the next several years. And although Gilead’s bottom line should start to pick up the pace in 2014 when (or if) its hepatitis C drug sofosbuvir is approved, that outlook is nothing more than a guess.
Of all the drug stocks that are vulnerable to a pullback, though, Bristol-Myers Squibb poses the biggest pullback risk.
The company is now into its second year of declining sales and profits, and FY2014 isn’t looking much better. The company’s in-development cancer drug nivolumab and lipodystrophy drug metreleptin are in the pipeline, and queued up for an approval in the foreseeable future. But the market seems to have priced in an absolute approval for both, and assumed both would hit peak sales very quickly. Once traders get a chance to digest a little reality, they might dial down the stock’s price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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