3 Nightmare Stocks of 2013 – JCP BJRI LLY

by Traders Reserve | December 10, 2013 11:29 am

3 Nightmare Stocks of 2013 – JCP BJRI LLY

Call them what you want: the weakest links, underperformers, dogs or just plain losers, the following three stocks have been investors’ worst nightmares thus far in 2013.

You might be surprised at some of the names, all are very well known in their industries. You could even say they’re household names in the U.S. and abroad. Yet for one reason or another, they’ve been horrible flops.

I’d like to be able to blame the ugliness on specific industries and just lump them in with their peers. But that excuse won’t fly. When each is compared to an Exchange Traded Fund (ETF) in which they belong, they stunk up the group. Yet in contrast, each of the ETFs still performed admirably.

Have these stocks seen their worst times yet?  Should you consider these stinkers as we head into 2014?  Take a look at the facts on each of these Nightmare Stocks for 2013.

 Eli Lilly +2.26%

Compare with: Market Vectors Pharmaceuticals (PHH[1]) +30% year-to-date

As you know, with pharmaceutical companies, one bad egg can spoil the whole carton. Eli Lilly (LLY[2])  has had omelet-sized setbacks lately.

In addition to failed treatments for depression and Alzheimer’s, the company is now facing its most difficult challenge and subsequent consequences could be severe and rapid.

Cymbalta, its treatment for generalized anxiety disorder, will see its patent expire this month (December), a 31.8% contributor to US revenue. Eli Lilly has protection for Cymbalta in major European countries until August 2014. Its patent for Evista, an osteoporosis treatment, will expire in March 2014.

A total of seven major patent protected products, accounting for 68% of Eli Lilly’s worldwide revenue in 2012, recently have lost or will lose in the following couple of years. Heavily reliant on its pipeline, the company will be forced to increase spending in R&D, a figure that has risen from 18.85% in 2008 to 23.73% today.

There is a sliver of good news, however, from China and Japan where sales increased by 28% and 15%, respectively. Japan is the world’s third-largest market for pharmaceuticals.

Until Eli Lilly shows improvement in sales and a more reliant pipeline, stay away from this stock heading into 2014.

BJ’s Restaurant -10%

Compare with: Powershares Food & Beverage ETF (PBJ) +28%

Investors are finding it very difficult to digest BJ’s Restaurant’s (BJRI[3]) second straight earnings miss due to falling sales and profit margins. Besides that, the stock is very expensive, trading at 28 times forward earnings.

Third-quarter results reported on Oct. 24 revealed a 7% rise in revenues to $188.2 million in the quarter, far short of expectations for $195 million. Same-store sales dropped 2.2%. Operating income declined 61% year-over-year to $3.5 million as the operating margin fell to just 1.9%.

Blame the decline on higher labor and benefit expenses and over all higher operating costs. Heading into 2014, there’s nothing on the horizon to suggest a turnaround is in the cards for the owner and operator of BJ’s Restaurant & Brewery, BJ’s Restaurant & Brewhouse, or BJ’s Pizza & Grill.

Leave BJ’s off your buy list for 2014 until the momentum pendulum starts swinging the other way.

J.C. Penney -61%

Compare with:  SPDR S&P Retail (XRT) +37%

J.C. Penney (JCP[4]) is having a store wide 50% off sale, but unfortunately it’s on the value of its stock. A favorite of short sellers, this retailer is struggling in the face of an economy that has been especially tough on stores that cater to the lower middle class.

It doesn’t sound all that bad when you read headlines about the company: sales and gross margins aren’t falling as quickly, but read between the lines and it clearly shows a $489 million third-quarter loss in sales. J.C. Penney loses 18 cents on every dollar of sales it makes, reflecting a poorly executed discounting strategy.

Some analysts even suggest the company will need to borrow serious cash to get through 2014 or potentially face bankruptcy. Until J.C. Penney can lure customers through the doors without such deep discounting, there’s no end in sight to the downward spiral.

Just say “no” to J.C. Penney stock in 2014—even at 50% off fire-sale prices.

Endnotes:
  1. PHH: http://studio-5.financialcontent.com/investplace/quote?Symbol=PHH
  2. LLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLY
  3. BJRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=BJRI
  4. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP

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