If the January pullback caught you off guard, you’re not alone. It was fast, big and seemingly out of nowhere. Plenty of investors who thought they’d have time to dump their marginal stocks before they got hit too hard were like deer frozen in headlights — too stunned to do anything.
The end result? Too many trades that are too deep in the red to sell now.
The good news is, after a couple of bullish days following a second push up and off of an established technical floor, there’s a good chance we’ve just made a trade-worthy double bottom and the tide is flowing in a bullish direction again. The bad news is, just because the tide is rising doesn’t mean every stock is going to rise as much — or as long — as the broad market does; the stocks that were vulnerable then are still weak names now.
With that as the backdrop, here’s a closer look at stocks to sell the next time they get anywhere near back to their previous peak levels. With any luck, the stock market as a whole will continue to push them higher to prices that are at least palatable exit points.
Stocks to Sell: Caterpillar Inc. (CAT)
Truth be told, Caterpillar (CAT) shares should have been sold long before late December. CAT shares were down more than 25% in 2015, and had fallen 15% from their peak headed into last year. Hopeful bulls were holding out the whole time, though, sure that sooner or later a reprieve would come.
It never did.
The culprit? The sky-high value of the U.S. dollar working in tandem with weak commodity prices … weakness that put the kibosh on investment in new drilling and mining equipment made by Caterpillar.
But why is CAT on a list of stocks to sell now? Isn’t the U.S. dollar starting to stabilize, and might it be possible that commodity prices have reached their ultimately cyclical bottom?
Probably, but just because a bottom has been logged doesn’t inherently mean Caterpillar is out of the woods yet. It could be months if not years before commodity prices — and confidence — rebound enough to drive growth for CAT. The fact that sales are already projected to fall 10% this year underscores the concern.
Stocks to Sell: GoPro Inc (GPRO)
GoPro (GPRO) will undoubtedly be the most hotly contended addition to any list of stocks to sell following any respectable rise.
Although the 80% pullback GPRO has dished out since August of last year makes it clear that most of the market agrees with the assessment, the few traders who like GPRO really, really like it … well enough to turn vocally combative with anyone who suggests its technology is “just a video camera” with mounting competition.
Well, in spite of the risks, the fact of the matter is GoPro cameras are just video cameras, and the competition is getting downright fierce.
It was a matter discussed in detail back on Jan. 13. That is, while the products are admittedly cool and clever, the number of people who care to spend a couple hundred bucks (or more) on action cameras is smaller than most GoPro investors care to believe, and within that crowd of consumers, most are content to purchase a lower-priced alternative. Even among those who want a top-of-the-line GoPro, though, the upgrade cycle here is nothing like it is with the Apple Inc. (AAPL) iPhone.
In other words, the product was never going to be able to sell up to the hype created by it. The company dialed back its current-quarter outlook to about a third less than analysts were expecting, but that’s just a microcosm of a bigger headwind.
Stocks to Sell: Lumber Liquidators Holdings Inc (LL)
Most of the time, corporate gaffes are forgotten much sooner than anyone believes they will be. Case(s) in point: Remember the Apple Maps fiasco? Most people don’t. How about Wal-Mart Stores, Inc. (WMT) asking employees to donate food to other, less fortunate employees in 2013? That one’s mostly “out of sight, out of mind” as well.
When your gaffe potentially causes cancer, though — and it seems as if you made an effort to conceal the truth — consumers aren’t as quick to forget.
And that’s pretty much the way it went down with Lumber Liquidators (LL) in 2015, when television news show 60 Minutes uncovered the fact that the flooring sold at its stores contained dangerous levels of formaldehyde … a known carcinogen. Fanning the flames of alarm was the likelihood that the company knew about it, and just didn’t care.
Some LL loyalists are touting the fact that the Centers for Disease Control recently declared Lumber Liquidators’ wares only had a low risk of causing cancer. If that’s the best thing that can be said of the company’s product at this point, however, it likely cemented in place consumers’ mindset that they should probably look anywhere else for a flooring deal.
Stocks to Sell: Twitter Inc (TWTR)
It may seem a little too easy to kick a stock while it’s down, but in that Twitter (TWTR) is never apt to get up again — at least not as the company it is today — any decent bullish move from TWTR should be viewed as an exit opportunity.
With user growth coming to a (literally) screeching halt last quarter, it’s no longer a question of whether or not Twitter will achieve sustainable viability. It’s now just a question how long it will take the company to collapse in on itself. If the company can’t grow its user base now after a concerted, all-out effort to do just that last quarter, it’s not likely it’ll be able to grow it at all in the future … ever.
That’s not to say TWTR isn’t the buyout target many have rumored it is. There are 300 million or so names up for grabs, and they’re a commodity in and of themselves. In that the structure of the company and its business model are flawed from the ground up, though, it’s not as if any suitor is going to pay a premium price after a rally. At best, a buyer would offer a premium price after a pullback.
Problem is, each pullback is going to cut deeper than the last. Better to get out sooner than later.
Stocks to Sell: Sears Holdings Corp (SHLD)
One has to give credit where it’s due. Sears Holdings (SHLD) is not going gently into that good night. After warning investors of yet another quarterly decline in sales last week, though — and announcing it was looking to sell another 50 stores or so to raise some much-needed cash — it’s pretty clear the company is too deep underwater to bail itself out of trouble now.
Actually, it was past the point of no return several quarters ago. But, just when it looked like it was ready to stop lopping off pieces of itself to raise cash and instead start to grow its business, it reverted back a mode that’s ultimately self-defeating. If it’s going to turn around, it needs more stores to generate more cash … not fewer stores. Stores are the profit center.
If Eddie Lampert hasn’t figured that out yet, he’s not going to now, nor is he going to figure out now what he hasn’t been able to figure out since he took over as CEO in 2013.
Stocks to Sell: Chesapeake Energy Corporation (CHK)
It can’t be entirely surprising to find an energy stock has earned a spot on a list of stocks to sell right now, in light of the implosion of crude prices.
Many fans of the sector would argue that crude oil prices have already found a bottom, though, and have nowhere to go but up … even if that rebound takes a long, long time. Such a bounce would certainly turn a struggling energy sector around.
It wouldn’t take all oil stocks with it, though.
One of the names in the group that may never get out from the weight of its own debt regardless of how much oil rebounds is Chesapeake Energy (CHK). It’s $10.6 billion in debt, $1.3 billion worth is coming due by 2017, and $500 million worth of it comes due next month. It’s a problem, because free cash flow was -$372 million in the third quarter, and CHK only has $1.76 billion in cash. The oil and gas driller is underfunded by $1 billion for the next couple of years. The math just doesn’t work no matter how much oil could plausibly rebound.
Chesapeake Energy vehemently denied rumors that surfaced last week that it was seeking bankruptcy protection, but the math doesn’t leave many other possibilities for the for the foreseeable future unless it sells even more pieces of itself.
As was the case with Sears, though, that marks the beginning of the end.
Stocks to Sell: FireEye Inc (FEYE)
Last but not least, while there’s no doubt cybersecurity is going to be an increasingly important service as the world becomes increasingly digital and increasingly mobile, it’s also becoming increasingly clear the business model FireEye (FEYE) is using to penetrate that market simply isn’t going to work for the long haul.
That business model? Buying growth. That is, the M.O. for FEYE has been spending generously to acquire companies it can integrate into its existing operation. The tactic has impressively grown the top line, but rather than its habitual losses shrinking as greater scale was found, they’ve held steady right around $134 million per quarter. What’s the point?
That being said, the lack of organic (and cost-effective) growth isn’t even the primary reason FEYE made this list of stocks to sell the next time it musters a little strength. The real red flag is quietly hiding on the balance sheet.
Up until the middle of last year, FireEye had avoided taking on debt to finance acquisitions. That’s changed, though. FireEye is now sitting on $706 million in long-term debt. Granted, it’s also sitting on $1.17 billion in short-term assets, but at its current pace of losses and acquisitions, that cash and near-cash could be gone soon. Throw in the fact that total equity continues to deteriorate as time moves on (it’s now down to $1 billion, from $1.25 billion just a year ago), and it becomes obvious the math of the business model just doesn’t make sense.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.