by Jeff Reeves | December 6, 2013 11:04 am
Everybody loves a good Cinderella story, where a shabby housemaid gets to be the belle of the ball.
But don’t forget that one of the most important parts of a Cinderella story is the graceful, well-timed exit. After all, nobody wants to be seen stumbling around in rags while their high-class wheels turn back into a pumpkin.
Keep this in mind if you’re sitting on some of these Cinderella stocks of 2013 that delivered a king’s ransom in profits … but really are just peasants dressed up in fancy clothes. If you get greedy and hang on to these picks too long, things may not end so happily ever after.
Here are five high-flying Cinderella stocks to sell before midnight strikes and they crash and burn:
Industry: Video game retail
Year-to-Date Gain: 80%
GameStop (GME) faced big declines in the past few years as the threat of digital downloads, mobile gaming and weaker consumer spending hung over the stock like a black cloud. There also were rumblings that the big video game companies would start cracking down on used games — a big part of GameStop’s business.
But then relief swept in this year as the next generation of gaming consoles, including the PlayStation 4 and the Xbox One, decided to pass on safeguards that would prohibit used titles. That news, followed by a few better-than-expected earnings reports, lifted GME stock dramatically in 2013.
Of course, the short-term pop from decent earnings and new console launches is nice… but cannot last. Brick-and-mortar retail generally remains threatened, but video gaming in particular faces an uphill battle as titles can be downloaded directly to tablets or even to Xbox gaming consoles. Why even visit your local GameStop if you’re a gamer?
GME stock has already started to crumble, giving up about 20% in the last month or so around earnings despite a good run for the broader market. The reason was a poor holiday sales outlook — and that says it all.
If GameStop can’t hit its numbers immediately after the launch of new Sony (SNE) PlayStation and Microsoft (MSFT) Xbox consoles, during the shopping-centric holiday season … then investors should really question if this stock has staying power.
If you’re still holding after the recent declines, sell GME stock now.
Year-to-Date Gain: 134%
Airline stocks are tough investments. The industry is characterized by regular bankruptcies, expensive pension costs, costly regulation and volatile fuel costs.
But one airline’s pain always seems to be another’s opportunity. And as American Airlines (AAMRQ) grappled with bankruptcy in the last year, Delta Air Lines (DAL) has been in the middle of a big turnaround.
Delta emerged from Chapter 11 itself in 2007, and that troubled period was quickly followed by the Great Recession. DAL stock languished, simply trying to hold things together … but now it has gotten its groove back and is back above where DAL started trading post-bankruptcy in 2007.
That’s thanks to a restructuring of its pension plan, cost cutting and modest revenue growth. According to Standard & Poor’s, fiscal 2013 could see four times the profits it saw in 2010 should projections hold, and more than double the earnings of last year!
Heck, Delta even announced an ambitious dividend and buyback scheme worth more than $1 billion — something unheard of in an industry characterized by regular bankruptcies and debt restructurings. What’s not to like?
A lot, actually. Because investors should remember that all these improvements from the bottom cannot be replicated going forward. Delta posted a quarterly loss as recently as 2012, and a lot of the gains this year were part of the snap-back from the bottom.
There just isn’t a lot of organic growth in airlines … and even if there is a cyclical recovery, a lot of optimism is now priced into DAL stock. The pressures of competition and higher fuel costs could really eat into margins next year, where the company is predicted a modest 10% earnings growth and less than 4% revenue growth.
That dividend yields less than 1% — so income is hardly a reason to hang on to DAL stock. Sell now before this high-flier comes in a for a rough landing in the new year.
Year-to-Date Gain: +240%
Semiconductor manufacturer Micron Technology (MU) makes a host of high-tech products found in computers and mobile devices — mostly in the flash memory space. And as tech investors should know, the biggest cash cow for semiconductor companies has long been the PC business — and a decline in laptop and desktop sales has worked against Micron.
So in 2008 and 2009, Micron underwent a major restructuring and laid off about 15% of its work force in an effort to reverse its fortunes. It also bought flash-memory company Numonyx for about $1.2 billion to improve market share, and teamed up with mega chipmaker Intel (INTC) on a few projects.
These moves resulted in a fantastic 2013 as Micron stabilized its top line and is actually projecting profits for fiscal 2014. Unsurprisingly, MU stock has soared as a result.
But how much upside is there really from here? The company trades at a forward P/E of 13.7 based on estimates for fiscal 2014 earnings — higher than Intel — but doesn’t pay a penny in dividends. Furthermore, the growth next year is being largely driven by acquisitions and partnerships — and while Micron stock has another $3 billion in the bank to make more moves, this isn’t a long-term strategy.
I’d sell this Cinderella stock now and lock in your big gains.
Sector: Specialty retail
Year-to-Date Gain: 252%
Best Buy (BBY) didn’t stand out to anyone as a company with a bright future at this time last year. The embattled big-box store has its hands full amid e-commerce competition and “showrooming,” and many left it for dead.
That pessimism was clearly overdone, however, as Best Buy has learned how to adapt and survive in this environment.
Although sales have actually declined for six consecutive quarters, Best Buy has managed to stage a pretty substantial turnaround by slashing costs. In fact, BBY stock will close this fiscal year with its first annual profit since 2011, and is forecast to then grow earnings a modest 9% again next year.
But investors shouldn’t confuse efficiency with growth, and if Best Buy was oversold a year ago, it could very well be overbought now. It’s undeniable that part of the pop in share price is thanks to founder Richard Schulze making noise about taking the company private, and a short squeeze that allowed the stock to double in a few months to start the year … but what will lift BBY stock in 2014?
Sector: Grocery stores
Year-to-Date Gain: 82%
Grocery stores are hardly an exciting business. The grocery game is notoriously low-margin thanks to frugal shoppers and high competition, the nature of a national distribution network for perishable foods can be maddening, and most grocery chains are regionally landlocked with little room for growth.
So what gives with Safeway (SWY) and its rip-roaring run?
Well, to start the year, roughly one-third of outstanding SWY stock was held by short sellers — that is, investors betting against the company. But rumblings about a potential buyout either for all or part of the company sent the bearish investors scurrying for the exits and boosted the stock. From January to April, SWY tacked on more than 60%.
Those rumors returned later in the year with talk of yet another buyout lifting shares more. As a result, after a sleepy summer, Safeway stock has jumped up about 25% in the last few months to give it one of the best returns in the entire S&P 500 year-to-date.
But there’s simply no way this can last. Either Safeway will be bought out or it won’t — and while there is a small chance of a premium above current pricing, it’s not enough to lock yourself into this investment considering the other opportunities out there.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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