This is not a forgiving market.
In particular, these seven stocks — Meade Johnson Nutrition (MJN), Hess (HES), Vale (VALE), Chevron (CVX), Caterpillar (CAT), Micron (MU) and Canadian Pacific Rail (CP) — are in no position to be forgiven.
Given the chance, these large-cap stocks will drown you.
The problem with being a diversified global company is you don’t have much to stand on when the entire globe is experiencing slow growth. You can’t expand into new markets or grow market share quickly to exploit potential high-growth markets.
Big companies have certain advantages, but they also have disadvantages as large as their market caps. These companies represent the downside of big exposure in bad markets.
And this isn’t the time to bargain shop. There’s still a lot of potential downside left for these firms because the sectors (or economies) they depend on aren’t showing much vigor yet. This is still the time to heed the adage, “Don’t try to catch a falling knife.”
Let’s take a closer look at these seven plummeting blades.
Mead Johnson Nutrition (MJN)
Mead Johnson Nutrition (MJN) has been around for 110 years, and it’s likely you’ve never heard of it. Well, it’s likely you’ve never heard of MJN, but you’ve likely t heard of its main product — Enfamil.
The founder, Edward Mead Johnson moved the company in 1915 from New Jersey to Indiana to access the abundant corn supplies for his infant formula. For the first decade of the company’s existence, it used potato flour that had been imported from Europe. It was a big move that paid off handsomely in the past century.
And certainly, there’s nothing wrong with the company per se. The real issue is that the global economy isn’t making it easy for MJN to sell its 70 products in 50 countries right now. Not even in the U.S.
Formula is expensive. And brand-name formula is a premium product. Until consumers are more confident — i.e., they have good jobs that are paying good money — and the dollar weakens, it’s going to be hard for MJN to post strong numbers.
Hess (HES) is an exploration and production company operating in the global energy patch. Most operations are in the U.S., but it also has projects in Equatorial Guinea, Denmark, Malaysia and Norway.
But regardless of this diversification, E&P is one of the worst-performing sectors in the markets right now.
With oil and natural gas prices so low, and with little to indicate that they’ll be surging up anytime soon, E&P firms have had to shutter operations, look to hedge existing production and inventory in a deflating market and generally batten down the hatches.
If HES isn’t producing, it’s not making money. And in the markets, if a company isn’t growing — either expanding its business operations or its stock price or both — its stock is avoided.
It should be no surprise then that HES is off 25% year-to-date. And the chilling reality is, it doesn’t look any brighter for a while. If the global economy stays weak, demand will be low and given the supply glut that already exists, E&P still won’t be a hot sector for many quarters to come.
Vale (VALE) is doubly cursed. First, it’s a metals and mining company — one of the world’s largest.
Aside from energy, metals and mining may be one of the worst possible sectors to be involved in right now.
Here’s the way it works: When an economy is doing well, things are being built and upgraded by the private and public sectors that require industrial metals, including consumer products.
But when economies are weak, the opposite is true. No one is building or spending.
VALE’s second curse: Its home country of Brazil is a wreck. Brazil was one of the top developing nations and was building like crazy for the Olympics and the the World Cup. Now, political and corporate scandals are the norm, and major projects have been mothballed, including in the energy services sector.
The only “bright” side is that stock is off so much — 47% year to date — that it’s yielding nearly 7%. But that is certainly a dangerous attraction; if the current conditions continue, that dividend will certainly be cut.
Chevron (CVX) would seem a rational port in the energy sector storm. It holds a large number of natural gas operations — the fuel of the future — and it’s diversified across the energy patch, so it doesn’t only have exposure to the E&P sector, for example.
The problem is, Chevron’s diversification actually hurts because it’s exposed across the entire sector. Nothing is doing well. Natural gas prices just hit five-year lows — when demand should be increasing as cooler weather arrives in the northern hemisphere.
Granted, CVX Q3 earnings surprised to the upside. But that isn’t saying much. Net income for the quarter came in at $2 billion — a 64% decline from the same quarter last year. Talk about the soft bigotry of low expectations.
But again, it was upstream operations — E&P specifically — that really hurt CVX. Downstream operations were solid as demand, while not growing, is steady.
The stock is off nearly 20% year-to-date and while it is throwing off an attractive 4.7% yield, it still has some downside left to navigate before it’s worth a look.
Caterpillar (CAT) is the world’s pre-eminent heavy equipment maker. If you need to move earth, build a dam, dig a mine, make a highway or anything else requires some serious equipment, CAT makes something for the job. It’s the ultimate indicator of economic health because it sells its wares all around the world.
Well, its recent numbers were horrible and that is a stern indicators that the global economy isn’t rallying, or anything close to it.
What’s more, CAT has seen 34 consecutive months of declining revenues and 11 consecutive months of double-digit sales declines. Revenue was down 20%. Operating profit was off 50%. Cash from operations is off 20%. Nowhere were sales improving.
CAT stock is off about 20% year to date, and why it isn’t off more is a mystery given its consistently bad performance. And even with its 4.2% dividend, you would still have lost about 16% this year.
What’s more, there’s little chance its fortunes will change anytime soon. Also, there’s plenty of competition in the high-growth markets in Asia, so even when the economy improves, it might not be enough for CAT.
Micron (MU) is the only tech company in this rogues’ gallery.
But it’s indicative of the challenges that are going on as chipmakers struggle for primacy in the new world of laptops and smartphones instead of desktops and mainframes.
Its seems that what was good news for MU at the beginning of October has come back to hurt in by the end of the month.
An announced deal with Intel (INTC) to work on a new generation of chips had helped boost MU early in the month. But now, analysts have digested INTC’s news that its rebuilding its memory chip plant in China, sinking $5.5 billion into the project. That means MU will be going up against INTC, which is going to hurt its margins for both memory chips and flash memory devices.
MU has been hit by declining margins for a number of sequential quarters, and this kind of competitive threat from a significant competitor won’t help matters.
Canadian Pacific Rail (CP)
Canadian Pacific Rail (CP) is under pressure for two specific reasons: the Canadian economy and the energy sector swoon.
The Canadian rail companies were a great way to play the boom in energy production in Canada and the U.S. CP has lines in both countries, and was doing very well when oil was booming on both sides of the border.
But when the oil dried up and E&P firms on both sides started capping wells and shuttering production, it meant CP no longer had all that business. This continues to be a serious issue for Canadian Pacific. Also, increasing regulatory pressure from politicians may eat into any margins CP has left.
Because energy was a big economic driver for Canada, it’s no surprise that the national economy has suffered. Slower growth means less spending, which means less consumption, which means CP ships fewer goods around Canada and the U.S.
The stock is off 27% year-to-date and there’s little to suggest that it’s near bottom yet.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.