Each week when the new issue of Value Line is available online, I surf on over and check out this week’s stock screens looking for ideas.
Over the years, I have found that the list of stocks that have the highest three- to five-year appreciation potential is an excellent source of long-shot and turnaround stock picks. But it occurred to me recently that inverting that list and looking for those with the lowest appreciation potential would give us a list of stocks that should at least be avoided or sold, and possibly even sold short if you are of such a mind.
The research service does not provide a list of low-appreciation potential, but it was quick and easy to produce one using the screener built into the site.
I did that this morning, and it produced some interesting names that investors should consider avoiding or selling.
Low-Appreciation Stocks to Sell: Boulder Brands (BDBD)
I am a little surprised and disappointed in myself for not discovering Boulder Brands (BDBD) without assistance. I have seen so many different food fads and healthy-living fads over the years that I really should have stumbled onto the gluten-free food company sooner.
While those who suffer from Celiac disease certainly have a good reason to avoid gluten, I find it hard to believe that there are anywhere near the estimated number of people who suffer from gluten sensitivity that the firm claims.
Even if I am dead wrong about that, the competition among gluten-free food providers has really become intense over the past year. This stock is trading at 35 times the always-highly-accurate analyst estimates, and I just cannot find a way to justify that type of multiple.
Value Line apparently agrees, as they project that company will have negative total returns for the next three to five years, period.
Low-Appreciation Stocks to Sell: DexCom (DXCM)
DexCom (DXCM) unquestionably makes a great product, and they should see strong earnings growth from their continuous glucose monitoring systems. They just announced a version of the morning system that can be tracked using your smartphone that has the medical and the user universes both excited.
Value Line actually projects that earnings will grow by a factor of five by 2020. The only problem with this wonderful growth story — you are paying too much for the stock.
The earnings estimate for 2020 is $2.25 a share, so you are paying 37 times annual profits four years from now. It’s a good company, but the price is just too high. The research publication expects average total returns of -50% to -15% over the next three to five years.
Low-Appreciation Stocks to Sell: Domino’s Pizza (DPZ)
Domino’s Pizza (DPZ) is showing decent growth and has been beating Wall Street’s estimates the past few quarters.
I prefer using local pizza and sub shops, but I seem to be in the minority, as the chain has been taking market share from its competitors in recent years. It is a good company, but the stock is priced like they were in the cancer-curing and world-saving business and not the pizza-making business.
The stock is currently trading at 32 times earnings, which just too high for a company in an industry this competitive.
To make matters worse, Domino’s is aggressively buying back stock at these inflated levels. They recently restructured their debt and announced they were using the cash to increase their buyback program by $600 million.
The company has a debt-to-equity ratio of 1.3 and should be using that cash to pay down debt in my opinion.
Value Line does not think much of the stock’s future, as they think the three-to-five-year total returns will be between -45% and -25% annually.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.
