Sometimes an investor finds holdings in his or her portfolio that should be let go simply because they have little chance of outperforming the market over some preferred period of time.
On other occasions, an investor finds stocks that should be jettisoned immediately because they’re simply in danger of going to zero.
Indeed, these aren’t just stocks to sell — they’re stocks an investor should have dumped a long time ago.
One classic mistake investors make is holding on to a losing position in the hope that it will bounce back. Another bad move is when an investor buys a stock because it looks cheap — and while it is cheap, it’s cheap for a reason.
The truth is that when a stock has an extremely low valuation (or per-share price), it’s usually distressed, and distressed companies are candidates for bankruptcy. Surprisingly, not all investors realize that when a company seeks Chapter 11 protection, their shares usually become worthless. In the case of Chapter 7, it’s a certainty.
Unfortunately, there’s no shortage of stocks that look like they could go to zero — and they’re not all in the beleaguered energy sector.
From an apparel retailer to brokerage firm to a shale oil driller, here are three stocks to sell because they could — could — become worthless:
Endangered Stocks That Could Go to Zero: Aeropostale Inc (ARO)
ARO Stock Price: 60 cents
1-Year Performance: -80%
Aeropostale (ARO) isn’t the only mall-based brand that’s no longer hot, but it’s one of the most troubled.
The once-popular teen retailer used to popular and the stock was a winner. Indeed, ARO was a solid market-beater a decade ago, topping out at about $30 a share — representing a tripler over the course of just a few years.
However, ARO failed to adapt to changes in fashion and trends. In other blows, mall traffic appears to be in secular decline, and fierce competition has emerged from the likes of H&M (HNNMY), Forver 21 and Inditex’s (IDEXY) Zara.
Aeropostale missed quarterly results, posted a loss for the 11th consecutive quarter and issued a bleak forecast in August. And with a sub-$1 share price that has lingered for well more than a month, ARO stock is increasingly in danger of being delisted.
Don’t be surprised if the current-quarter report — which includes the back-to-school season — is another nail in the coffin.
Endangered Stocks That Could Go to Zero: Magnum Hunter Resources Corp (MHR)
MHR Stock Price: 35 cents
1-Year Performance: -93%
Plenty of smaller U.S. shale drillers are in danger of going bust with the crash in crude prices, but Magnum Hunter Resources (MHR) is a particularly troubled producer.
MHR is strapped for cash, holding a meager $11 million in cash and investments versus roughly $950 million in debt.
Natural gas prices trade in line with crude oil, and with both in the basement, credit has become harder to get and more expensive. Magnum recently had to scrap its dividend and hire a financial adviser to “explore all potential strategic alternatives.” Sure, that could mean a sale — but with $1 billion in liabilities and a projected annual loss of $1.12 per share (70% worse than its year-ago loss), who would want it?
MHR could find a way out of its predicament, but it will take something drastic to survive this fight against dwindling liquidity.
Smaller drillers are failing all over the map, Magnum Hunter is as good a candidate as any.
Endangered Stocks That Could Go to Zero: RCS Capital Corp (RCAP)
RCAP Stock Price: $1.14
1-Year Performance: -94%
Ordinarily, a micro-cap brokerage stock like RCS Capital (RCAP) wouldn’t get much attention, but a well-known real-estate macher and an accounting scandal have put it in the spotlight.
Controlled and originally led by Nicholas Schorsch, RCAP stock tumbled when another one of his companies — formerly American Realty Capital, now known as Vereit (VER) — became embroiled in an accounting scandal.
That has left RCAP struggling for liquidity under a heavy debt load. As of the most recent quarter, the firm had liabilities of $1.59 billion versus $195 million in cash, as well as negative cash flow from financing activities.
Media reports have it that RCAP is looking to sell the Cetera brokerage business for $700 million after buying it only last year for nearly twice that. According to Bloomberg, RCAP needs the capital to avoid a messy debt default.
As of this writing, Dan Burrows did not have a position in any of the aforementioned securities.