5 ‘Problem’ Stocks to Avoid in 2014

by James Brumley | December 20, 2013 12:51 pm

5 ‘Problem’ Stocks to Avoid in 2014

The Federal Reserve has already noted it expects 2014 to be a decent year for the economy, projecting the United States’ GDP to expand somewhere right around 3%. And, given the second upward revision to Q3′s growth rate[1] — from 3.6% to 4.1% — one can’t help but wonder if the current outlook for the coming year is still too conservative.

BestStocks2014size185 5 Problem Stocks to Avoid in 2014[2]It’s all quite encouraging for the stock market as a whole.

That doesn’t, however, necessarily mean that every stock out there is going to benefit from that tailwind. A handful of stocks are apt to struggle (if they’re not already struggling) next year, and as such they offer little value to investors right now.

We’ll take a look at five stocks to avoid because they could have a rough go of things in 2014 … but first, it should be pointed out that not all of these companies are necessarily doomed organizations. In fact, none of them are on their death beds.

All of them might have some growing pains to go through, however, and that often means turbulence for their stocks.

Stocks to Avoid #1: Cisco (CSCO)

Cisco185new 5 Problem Stocks to Avoid in 2014You have to give credit where it’s due. Once Cisco (CSCO[3]) fell out of favor about 10 years ago (following the dot-com implosion on the heels of the fact that swarms of networking/router competition popped up to make life tough for Cisco), many presumed it was only a matter of time before the company simply vanished.

Well, not only CSCO still alive and kicking, but it has posted revenue growth in nine of the past 10 years. The coming year, however, might finally be the one in which Cisco’s size and lack of a distinguishing flagship product catches up with it.

Oh, the company still makes routers, servers, communication systems, cloud solutions and more … all marketable stuff. CSCO stock offers plenty of value too, with a trailing P/E of 11.5 and a forward-looking one of 10.

But there’s a reason CSCO stock is down 20% over the past four months (allowing shares to become this cheap), and that reason is simply that the market doesn’t have much faith that Cisco will be able to remain as competitive in 2014, as it has little on its product menu to get and keep the market’s attention.

Stocks to Avoid #2: Twitter (TWTR)

Twitter185 5 Problem Stocks to Avoid in 2014It undoubtedly will be an unpopular idea, but Twitter (TWTR[4]) is overrated and overestimated[5].

Even if Twitter does manage to grow revenue as it plans to do in 2014, it might be years — perhaps decades — before it can grow the top line to a point that justifies the current price of TWTR stock.

SunTrust’s Robert Peck said it best:[6]

“While we think the long term potential for Twitter’s valuation is much higher, we think in the near term it has become stretched. On consensus 2014 revenue and EBITDA estimates, it trades at 36x and 295x (34x and 235x based off of our estimates). On 2015 consensus, the company still trades at significant premiums, at 23x and 125x (over 20x and 113x our estimate). In comparison, the average of other industry fast growers is 8x 2015 Revenues and 24x 2015 EBITDA. EPS and FCF valuation multiples are non-meaningful given their nascent positive turn.”

There’s a good chance all of Twitter’s shareholders, as well as non-shareholders, could crunch the numbers sometime in 2014 and decide holding TWTR stock doesn’t make sense.

And, even if Twitter does continue to grow at its rapid pace, with the market’s expectations as high as they are, there’s no margin for error or shortcomings.

Stocks to Avoid #3: KB Home (KBH)

kbh 5 Problem Stocks to Avoid in 2014[7]While the home construction industry continues to heal as a whole, it’s still a somewhat uneven recovery. The far-western part of the United States, for instance, isn’t experiencing the same real estate rebound most of the rest of the country is enjoying.

That’s taking a direct toll on KB Home (KBH[8]), which posted surprisingly disappointing Q3 results[9]. Its per share profit of 31 cents was well shy of the expected 45 cents, and revenue was more than 6% shy of forecasts.

To be fair, the year-over-year comparisons of the top and bottom line were positive last quarter. A stock’s value is largely dictated by expectations, however, and now the market realizes it might have been expecting too much from KB Home. That could prove to be a drag on KBH stock for several months.

Stocks to Avoid #4: Sirius XM (SIRI)

SIRIUS XM RADIO LOGO1 5 Problem Stocks to Avoid in 2014[10]Sirius XM (SIRI[11]) has been an amazing and fun-to-watch success story, inventing an industry that didn’t exist a decade ago, and growing its user base to its current following of about 25 million subscribers. The company’s revenue has grown accordingly, and SIRI is on pace to generate $3.8 billion this year.

However, times — and technology — are changing, and 2014 might be the year that satellite radio finally has to fend of more competition than it’s adequately equipped to do[12].

That competition? A combination of Pandora (P[13]), Spotify, iTunes and, more broadly, mobile Internet. Apple (AAPL[14]) and iTunes has been around for a while, as has Pandora, and neither has been able to unseat Sirius XM as the king of portable audio. As of this year, however, most mobile phones in the United States are web-enabled smartphones, which can largely accomplish the same thing Sirius XM receivers accomplish (yet are far more portable and flexible than satellite radio receivers). Mobile broadband is becoming prolific too, and it’s even more portable than satellite radio.

Perhaps most alarming of all, smartphones are taking aim at Sirius XM where it enjoys its strongest hold — in your car[15]. Though it has been around for a while, the technology used to connect an automobile’s audio system to a smartphone — through programs such as Microsoft (MSFT[16]) Sync in Ford (F[17]) vehicles — is gaining popularity. That means Sirius XM will be forced to compete more with the quality of its programming rather than the convenience of its technology.

It’s not clear whether its programming alone will keep subscribers interested enough in Sirius now that a viable alternative exists. SIRI has proven it can draw a crowd even in the face of competition, and considering about 60% of all new cars are now manufactured with a Sirius XM receiver built-in to the dashboard, the company will find it has a steady flow of new prospects trying out the service.

Still, the issue for investors is that the stock has presumed faster growth than Sirius is likely to be able to generate now that mobile Internet is becoming common.

This proverbial writing on the wall might be why SIRI stock has crossed under its all-important 200-day moving average line this month. So it could get much worse before it gets better.

Stocks to Avoid #5: Vanguard Total Bond Market ETF (BND)

Vanguard 5 Problem Stocks to Avoid in 2014[18]OK, so this isn’t a stock, but it’s still worth avoiding.

Truth be told, most bond funds are poised to struggle in the coming year. But since the Vanguard Total Bond Market ETF (BND[19]) is the biggest bond ETF out there, it’s the best choice to use as our proxy.

The reason bonds and their funds are headed for a headwind is simple … the Federal Reserve has finally begun to “taper” by easing back on the size of their monthly purchases of Treasury bonds. The ripple effect will be diminished demand for all sorts of fixed-income instruments[20] as institutional and retail investors follow that lead and extrapolate the idea to non-government bonds and paper. Less demand equals lower prices.

Thing is, now that the taper ball is rolling, it’s not apt to stop. Deeper cuts to the Fed’s bond-buying efforts are on the horizon, and that’s bad news for BND.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. second upward revision to Q3′s growth rate: http://online.wsj.com/news/articles/SB10001424052702304367204579270003162012122
  2. [Image]: http://investorplace.com/hot-topics/best-of-2013-and-2014/
  3. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  4. TWTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWTR
  5. overrated and overestimated: http://investorplace.com/ipo-playbook/twtr-stock-twitter-analysts-ads/
  6. SunTrust’s Robert Peck said it best:: http://www.streetinsider.com/Analyst+Comments/SunTrust+Robinson+Humphrey+Downgrades+Twitter+%28TWTR%29+to+Neutral,+Valuation+Stretched/8980088.html
  7. [Image]: http://investorplace.com/wp-content/uploads/2011/05/kbh.gif
  8. KBH: http://studio-5.financialcontent.com/investplace/quote?Symbol=KBH
  9. which posted surprisingly disappointing Q3 results: http://news.investors.com/121913-683508-kb-home-badly-misses-earnings-revenue-estimates.htm?ven=yahoocp&src=aurlled&ven=yahoo
  10. [Image]: http://investorplace.com/wp-content/uploads/2012/11/SIRIUS-XM-RADIO-LOGO1.jpg
  11. SIRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIRI
  12. has to fend of more competition than it’s adequately equipped to do: http://investorplace.com/2013/11/sirius-stock/
  13. P: http://studio-5.financialcontent.com/investplace/quote?Symbol=P
  14. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  15. smartphones are taking aim at Sirius XM where it enjoys its strongest hold — in your car: http://www.forbes.com/sites/matthewdepaula/2012/05/19/in-four-years-most-cars-will-work-with-smart-phones/
  16. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  17. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  18. [Image]: http://investorplace.com/wp-content/uploads/2011/12/Vanguard.jpg
  19. BND: http://studio-5.financialcontent.com/investplace/quote?Symbol=BND
  20. The ripple effect will be diminished demand for all sorts of fixed-income instruments: http://www.cnbc.com/id/101282534
  21. 5 Small-Cap Mutual Funds for Growth: http://investorplace.com/2013/12/small-cap-mutual-funds-to-buy/

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