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 — from 3.6% to 4.1% — one can’t help but wonder if the current outlook for the coming year is still too conservative.
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)
You have to give credit where it’s due. Once Cisco (CSCO) 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)
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.
“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)
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), which posted surprisingly disappointing Q3 results. 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 (SIRI) 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.
That competition? A combination of Pandora (P), Spotify, iTu