Christmas is the time of year that we indulge fantasies and fairy tales. The lonely tin soldier bravely saves the day, the misfit toy gets some love and the long-suffering stepdaughter gets to be the belle of the ball.
Everybody loves a good Cinderella story. But don’t forget, one of the most important parts of a good 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 2014 that delivered big-time profits but are in danger of a serious breakdown in the New Year.
Here are five stocks to sell before the clock strikes midnight.
Cinderella Stocks to Sell — Alcoa (AA)
Commodity stocks have been trounced in the last year or two thanks to a strong dollar and weak demand from emerging markets. But Alcoa (AA) is one of the top performers in the S&P 500 year-to-date with an amazing 60% gain since January 1.
As nice as this is for the bottom-fishers who made a bold call on this aluminum giant, don’t expect Alcoa stock to stick at the top of the heap in 2015. Take the money and run.
A big boost to Alcoa lately has been higher fuel-efficiency standards pushing automakers away from steel and towards more lightweight materials like aluminum. However, a rising interest rate environment could make new car purchases more difficult for consumers. And the boom in the auto industry is anything but a sure thing globally, as China auto sales hit a 19-month low in October and manufacturers like Nissan (NSANY) and Honda (HMC) continued to see painful sales results in November.
And beyond demand, the pricing picture for commodities should remain weak as aluminum manufacturers have already cut back on production dramatically over the last few years and can’t really strip out much more supply at existing plants.
Furthermore, the U.S. dollar is destined to remain quite strong in 2015 amid a struggling EU and Japan — and with the prospect of tighter monetary policy from the Fed. A strong dollar naturally means dollar-denominated commodities like oil and gold and aluminum have weak pricing — and that price weakness will persist.
It all adds up to big headwinds for Alcoa. The rebound from the bottom is nice for those who got in this year, but don’t expect a repeat performance in 2015.
Cinderella Stocks to Sell — Yahoo (YHOO)
Yahoo! Inc. (YHOO) has outperformed in 2014, up 26% on the year vs. about half that for the broader market, thanks to the windfall provided by the recent Alibaba Group (BABA) IPO. In the short-term, Yahoo’s stock is up about 30% in three months vs. just 3% gains for the S&P in that period, thanks to the impressive debut of Alibaba’s stock in late September.
But look beyond Alibaba, and you’ll see there are serious challenges facing Yahoo.
In October, Yahoo posted yet another decline in display ad revenue, down 5% from a year earlier, driven largely by a continued drop in desktop ads. The company’s mobile ad revenue was $200 million, or 17% of total sales (which came in just under $1.2 billion).
The risks here are obvious, but when taken alongside big-time investments in mobile that haven’t paid off, Yahoo stock looks even more dicey.
Consider that since Marissa Mayer took over as CEO in 2012, Yahoo has burned through $1.6 billion on acquisitions. The biggest chunk of that was about $1.1 billion for Tumblr, but the rest is from a queer assortment of startups, including social-data-visualization company Vizify, streaming-video startup RayV, and other assorted boondoggles.
In fact, the company’s desperation to buy its way into mobile was enough to prompt major investors to pen an open letter to Mayer and Yahoo in September, recommending (among other things): “Halting Yahoo’s aggressive acquisition strategy, which has resulted in $1.3 billion of capital spent since the second quarter of 2012 while consolidated revenues have remained stagnant and EBITDA has materially decreased.”
Yahoo is in an ugly spot, with no real future in mobile despite its shopping spree and continued pressure from a declining web ad business.
Take the money from the Alibaba IPO and run. There’s no guarantee that YHOO stock has a second act after this BABA windfall.
Cinderella Stocks to Sell — Tesla (TSLA)
Tesla Motors Inc (TSLA) has had another great year, with shares of TSLA up more than 50% since January.
However, Tesla stock could run out of juice in early 2015, based on a combination of unrealistic expectations and the potential for a massive turnover in sentiment.
As InvestorPlace technical analyst Serge Berger recently pointed out, the charts are not shaping up nicely for Tesla as it slumps down to touch its 200-day average. A key support level of about $230 per share is being tested, and if TSLA breaks through to the downside we could see some big short-term pain across the next few weeks and months.
As for sales and profits, consider that the Tesla Model S isn’t even the best-selling electric vehicle in America. That title belongs to the Leaf from Nissan Motor Co Ltd (NSANY). According to InsideEVs, Nissan has sold more than 27,000 Leafs in 2014. In the No. 2 spot rides General Motors Company (GM) with its Chevrolet Volt moving more than 17,000 autos. Tesla is down there at No. 3 with just under 14,000 sold in the U.S. through the end of November. Clearly, other EV companies have upside and Tesla isn’t as dominant as some investors think.
Throw in lower-than-expected deliveries in Tesla’s most recent earnings report and a delay in deliveries of its Model X SUV, and it’s clear that production also continues to be a big concern heading into 2015.
Wall Street fell in love with Tesla’s growth, but sentiment can turn fast. And when you consider that Tesla’s 2-cent profit was down considerably from Q3 2013′s 12 cents per share, it’s worth pumping the brakes on Tesla or risk a serious crash if numbers disappoint in the coming months.
Cinderella Stocks to Sell — Intel (INTC)
Intel Corporation (INTC) has proven quite a profit machine in 2014, with 45% gains year-to-date in share price alone. To top it off, Intel just held its annual investors meeting in Santa Clara, Calif., and used the occasion to announce a dividend increase and provide forward guidance.
But investors shouldn’t be lulled into a false sense of security here. The mobile revolution remains a big threat to Intel, which has relied on surprisingly strong PC and laptop sales to get through, and a lot of the appreciation in INTC stock this year has been on comparatively weak revenue growth.
Consider that its forward guidance recently included revenue growth in “the mid-single digits.” Does that really sound inspiring?
At the same time, Intel is spackling over its mobile challenges with plans to merge its currently separate mobile and PC units in 2015. The company claims that’s a way to place more brainpower behind its push into microprocessors for smartphones and tablets, but investors should note that squashing these two groups together reduces visibility into how the company as a whole is performing.
Morgan Stanley downgraded Intel stock after its latest earnings report, with fears of “limited upside” and worries about rising inventories. MS put a $30 target on Intel stock — and shares fell immediately after earnings in part because of this bearish assessment. More recently, analysts at Bernstein followed up with a similar downgrade and a $30 target of their own in November.
Clearly, Wall Street doesn’t trust the tailwind in revenue to continue, and it’s skeptical of the new reporting going forward for Intel stock and its combined mobile and PC divisions. And with Intel stock’s forward price-to-earnings ratio of almost 16, now the premium is simply too much.
If you own Intel, I advise taking profits off the table. And if you don’t own INTC stock, don’t buy until it’s back in the ballpark of $30, as many analysts expect it to be in the next 12 months.
Cinderella Stocks to Sell — Electronic Arts (EA)
Video game publisher Electronic Arts (EA) has had a killer 2014, with the stock doubling since January.
However, shares may have run up way too much in too short a period of time.
Electronic arts has seen a lot of success, sure, but that’s largely thanks to sequels including its latest Madden football game and its Battlefield first-person shooter franchise. Sequels are the gift that keeps on giving in some respects, but they also prevent a company from really moving beyond its core sales and into new areas.
And there’s the rub. EA has built its business around console games, but the mobile revolution has left it far behind. Consider, for instance, that mobile revenue last quarter totaled just $123 million of $990 in total sales – or about 12%. That’s lower even than PC-based sales, which marked $208 in total revenue last quarter.
When you make more money off of PC gaming then mobile gaming, that means a vastly untapped market in this age of smartphones and tablets.
Electronic Arts has been navigating this industry evolution a bit, with the launch of services like its EA Access service on Xbox that provides gamers a catalog of old EA titles for a monthly fee, but that’s not enough.
Earlier this month, it cancelled a planned release of Dawngate, its upcoming free-to-play MOBA — that’s multiplayer online battle arena, a format that has been a smash hit for rival publishers like Riot that developed League of Legends. That cancellation is a massive missed opportunity in what could be the hottest segment of the coming years.
The video game biz is notoriously fickle, with publishers rising and falling quickly based on how popular their latest title is and how the reviews are. Banking on a repeat performance of EA’s run in 2015, then, is quite a risky bet — and the lack of diversification beyond its core console franchises doesn’t leave much room for error.
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 hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.