Kiss These 4 Stocks Goodbye if the Broader Market Tanks

by James Brumley | February 6, 2013 8:23 am

Investors in a number of high-flying stocks have been eating high on the hog for months while their investments beat the daylights out of the market’s already-impressive rally since mid-November.

However, in lieu of a couple of recent stumbles for the market, one has to wonder if we’re at a minor — or even major — top for stocks. And if we are, then some of these recent hot runners are poised to fall farther and faster than most other names.

Here’s a look at the most vulnerable of these names:

Procter & Gamble

To give credit where it’s due, Procter & Gamble (NYSE:PG[1]) topped revenue and income estimates last quarter, with per-share profits improving 11% from the year-ago period. Analysts love it, the media loves it, and considering the stock is up 6.6% since Q4’s earnings were unveiled (and up nearly 12% since late December), it’s pretty clear the market loves it, too.

And that’s exactly why P&G is so vulnerable right now — the “as good as it gets” syndrome.

Seriously. There are no further catalysts left to prod it higher, and Procter & Gamble is very much a stock that requires catalysts to move higher.

Berkshire Hathaway

While most investors know what Berkshire Hathaway (NYSE:BRK.A[2], BRK.B[3]) is, many investors don’t fully understand how it’s priced. It’s not exactly a mutual fund, not exactly a stock, and not exactly an ETF … yet has qualities of all three. That’s not even the tricky part about pinning down a value for this investment fund, however.

The real wrench in the works is the fact that some of the holdings in Berkshire aren’t publicly traded stocks. Geico and See’s Candies are a couple of these privately-held names. They still need to be valued, however, so Berkshire shareholders can get a grip on what the underlying portfolio is actually worth; think net-asset-value, like a mutual fund. The wrench is, those valuations are made by accountants and auditors rather than the market, which means the NAV or book value is ultimately just a guess, and may or may not factor in changing economic conditions the way stocks do in the real world.

Why does that make Berkshire so vulnerable now? Because thanks to the rally since early November, Berkshire’s “A” shares say the fund is worth $147,086 per share, up 32% from the end of the third quarter, when each share’s net asset value was calculated to be worth $111,718 per share. That run came after Warren Buffett announced a huge buyback in A shares[4] back in December at $131,000, meaning they’re currently well above the premium Buffett paid for them.

And Buffett is cheap.

Make no mistake — Buffett and his protégés are some of the best stock pickers in the world; the companies that make up Berkshire Hathaway are all rock-solid. Just bear in mind that the S&P 500’s year-over-year earnings growth for Q4 so far has been a paltry 0.1% for a reason. Even if Berkshire is holding only the best companies in the world, it’s tough to believe they’re worth 32% more than they were just one quarter ago.

It’s a bit of a disconnect that unfortunately is apt to reconnect at a much lower valuation.

The Home Depot

There’s no denying that Home Depot (NYSE:HD[5]) has been one of the heroes of the rebound in the construction market. Housing starts have grown from an annualized rate of 518,000 in February 2011 to 954,000 per year as of December. During that time, HD shares have appreciated by 81%, reflecting an equally impressive rise in the company’s bottom line.

There’s just one problem, though: The stock’s growth has far outpaced Home Depot’s earnings growth, making the stock the most expensive it has been (on a P/E basis) since 2002. As of my last look, shares are trading at 23.6 times earnings.

It’s a great company to be sure, but with so much pent-up profit-taking potential, even the smallest of stumbles could pull the selling trigger here on this very frothy stock.


Carnival (NYSE:CCL[6]) can be tough to peg sometimes. Half the time it appears to trade based on historical results. The other half of the time it appears to be disconnected from corporate results, and instead acts as a barometer of consumer confidence. That’s a problem for the stock right now, as nothing is better at spooking consumers than a falling market.

Yes, per-share earnings are expected to move higher in 2013, up 28% from last year’s bottom line. Carnival also has topped estimates in the vast majority of its recent quarters. Income still has fallen in three of the last four years, however, and revenue finally started to fade in 2012, too.

Investors are patient, but not oblivious. If and when it looks like the market and/or the economy are sour, Carnival could be one of the first names shed in a flight from risk.

The Final Word

While these four mainstays are theoretically among the market’s most vulnerable stocks should the market decide to head south, there was another subtle hint dropped Friday and again Monday that such a pullback is indeed nigh. It came from the Dow Jones Industrial Average, with a peak just a tad above 14,000 on Friday, and a high just above 14,000 on Monday before the sizable pullback. On Tuesday, it approached that target again but never touched.

Right or wrong, traders see those big, round numbers as key ceiling and floors. Were investors simply ready and waiting to turn things around once that big round number was reached, thus creating a self-fulfilling prophecy? Possibly. It certainly looks as if that could be the case anyway. If so, then the market’s got more downside to dole out, with the names mentioned above poised to lead the charge lower.

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

  1. PG:
  2. BRK.A:
  3. BRK.B:
  4. Warren Buffett announced a huge buyback in A shares:
  5. HD:
  6. CCL:

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