At this time of year we hear lots of talk about what we should be buying. How about telling investors what they should sell or avoid?
If I think about the best ideas I have come up with over the years, the single greatest has to be my literal pounding on the table for investors to sell stocks just before the market crumbled during the fiscal crisis of 2008.
The funny thing is I have had so many more great buying recommendations, and yet it is the sell recommendation that I remember the most.
In that spirit then I can think of one asset class I would avoid entirely in 2014:
We hear so much about bubbles and all that sort of nonsense after a strong market rally and the eclipsing of important numeric barriers like Dow 16,000 or Nasdaq 4,000 but we never hear little about the skyrocketing valuations in dividend stocks.
In 2013 many dividend stocks caught a bid and kept right on soaring throughout the year.
That makes sense given the historically low interest rate environment. In addition many dividend stocks were considered safe havens for many investors that were concerned about an economic collapse or possibly worse.
The truth is the economy is in fine shape. As the year closes out, we are getting revised economic data that shows economic growth to be even better than originally thought.
The Federal Reserve is taking action to remove monetary stimulus by reducing its bond-buying program. Most believe interest rates in 2014 will be going up.
Put it all together and dividend stocks are likely to be the single worst asset class for 2014. I can think of 3 stock names in particular that I would avoid. Keep these clunkers out of your portfolio.
The mustard is already coming off this hot dog. Shares of AT&T (T) have collapsed after peaking at a price of $39 per share this past spring. Along the way down, however, the stock found a bid from investors attracted to the 5% dividend. Don’t be one of those investors. Analysts expect the company to grow profits by 8% in 2014. At current prices, shares trade for 13 times 2014 estimated earnings.
I don’t think it’s ever a good idea to pay a double-digit multiple of earnings when a company is growing profits at a single-digit clip. It is hard to see where the catalyst for future growth will be for AT&T. The smartphone phenomenon has essentially run its course.
AT&T will be lucky in my opinion to grow profits by 8% next year. I would definitely avoid this stock in 2014.
For some reason, certain companies can attract buyers no matter the circumstance. I would put Symantec (SYMC) in that category. Shares have gained nearly 20% this year even as Symantec’s prospects deteriorated.
The demise of the personal computer is the major problem for the company. Smart phones and tablets simply do not have the same security concerns, thus the revenue opportunities are going to be lower going forward. Analysts are being generous with an expectation of 7% profit growth in the next fiscal year ending March 2015.
At current prices, shares trade for 13 times current fiscal year estimated earnings. A near-3% dividend yield is not enough to justify the risk here. I think this stock could be the worst-performing stock of the year.
Cliff’s Natural Resources
Cliffs Natural Resources (CLF) saw a decline in share value last year. The selling will likely continue in 2014.
From an energy perspective, the death of coal may have finally arrived. It’s a dirty, nasty and disgusting fuel source. The boom in natural gas as a reliable alternative has precipitated the fall. I’d be concerned about that 2.5% dividend. That’s really the only reason to own this stock and that number does not compensate for the collapse in profits here. Analysts expect the company to earn $3.01 per share this year. Next year that number is sliced by a third to $2.01 per share. I wouldn’t pay a double-digit multiple for this profit stream. It will likely get worse before it gets better. Dividend hunters can find yield elsewhere and in 2014 there will be more options to choose from.