It happens every time the market takes a beating — overly optimistic traders who ascribe old growth stories to stocks consider them “oversold” and make the case for a value buy at what they see as the bottom.
But catching a falling knife is much easier said than done, and too often, well-meaning value investments turn out to be value traps that go nowhere or decline even further.
The reality is that many stocks that have declined quickly and substantially over the past 12 months have done so for good reasons. Maybe they have seen margins implode as they can’t command the same price for their products. Maybe they have seen revenue crumble and customers have abandoned them. Or maybe they simply were grossly overbought before when investors were “risk-on,” and now Wall Street has come to its senses.
The following seven stocks all have good reasons like these for their declines, and should be seen as value traps and not bargains right now.
Value Traps That Are NOT Bargains: Apple Inc. (AAPL)
Shares of Apple Inc. (AAPL) have been pounded in recent months, down 18% in the last year and off almost 30% from their summer highs. Still, many investors are hanging on to the old image of Apple as a growth powerhouse.
Apple is suffering a serious slowdown in its iPhone sales, with less than 1% annual growth. Worse, Apple has forecast that iPhone sales have peaked and will dip year-over-year for the first time since the device’s 2007 launch, and overall revenue will now decline for the first time in 13 years.
When earnings per share are only growing in low single digits despite a massive $200 billion buyback program approved in 2015 … well, it’s safe to say the best days of Apple are behind it.
With momentum clearly to the downside and fundamentals deteriorating, you do not want to bargain hunt in AAPL anytime soon.
Value Traps That Are NOT Bargains: Yahoo! Inc. (YHOO)
Yahoo! Inc. (YHOO) has been one big disappointment for investors. Aside from its windfall success thanks to riding the coattails of Alibaba Group Holding Inc (BABA) across 2014, there has been no reason to trust this stock for some time.
And the latest earnings proved that yet again.
Recently, Yahoo reported earnings that were good on the surface — in-line EPS and a modest beat on revenue. However, the problem is that both those metrics continue to slump year-over-year, and analysts expect another 8% decline in both EPS and revenue in fiscal 2016. So doing what’s expected is hardly a vote of confidence.
Additionally, investors are confused by recent overtures of a restructuring and possible spinoff of various assets. I mean, when you announce a $400 million cost-cutting plan, lay off 15% of your employees and can’t encourage Wall Street … what can you do?
The problem is that investors doubt that CEO Marissa Mayer has any clue how to right the ship, cost-savings or no. After all, she hasn’t exactly been the best steward of capital with efforts like the $1.1 billion purchase of Tumblr — a 2013 move that was a head-scratcher at the time, and that just saw a $230 million write-down a mere three years later.
Yahoo needs serious change. And until YHOO gets it, you shouldn’t bother with its stock.
Value Traps That Are NOT Bargains: Twitter Inc (TWTR)
I have been a persistent bear on Twitter Inc (TWTR) since late 2014. And even though shares are down more than 70% from their 52-week high, it is dangerous to think that the worst is over for Twitter.
Twitter is an unprofitable company (under generally accepted accounting practices, anyway, not their own fuzzy math) and TWTR growth remains seriously challenged.
User growth has slowed to the low double digits year-over-year and is effectively flat quarter-over-quarter. The top line is rising nicely, with good revenue growth for TWTR stock lately, but there remains the acute problem of rising costs along with that. In Q3, revenue was up 57.5% year-over-year … but costs of revenue were up 61.2%. It’s hard to ever get ahead with math like that.
And bigger-picture, TWTR stock simply doesn’t have the trust of Wall Street. A protracted CEO search in 2015 resulted in Twitter settling on co-founder Jack Dorsey, a guy who actually was fired from the top job previously and whom Twitter initially ruled out because he would be splitting time between the social media company and his mobile payments start-up Square Inc (SQ). But the board settled on Dorsey — and a few short months later, we saw a mass exodus elsewhere on the leadership team.
Sure, there is clearly a need for a shakeup, but Twitter seems to be moving out of desperation lately. Investors need to see big improvements in both fundamentals and corporate strategy before considering TWTR stock a bargain.
Value Traps That Are NOT Bargains: Chipotle Mexican Grill, Inc. (CMG)
Chipotle Mexican Grill, Inc. (CMG) has been in a tailspin since last summer, with a loss of almost 40% from its 52-week high driven in large part by food poisoning concerns.
But this isn’t just a case of investors getting indigestion. Consumers have lost trust in a big way, and the numbers show it. Same-store sales growth, once a huge bright spot with regular double-digit expansion, posted its first-ever year-over-year decline with a 14.6% plunge in Q4 2015.
Furthermore, overall sales dipped 6.8% to miss revenue targets.
It’s tempting to think this is all driven by E. coli. However, history shows that momentum stocks can see growth come to a halt quickly, and it’s difficult to believe that the growth story will get back on track and continue for the long-term if and when these supply chain fears subside.
After all, in 2015, CMG increased its store count by almost 13% to over 2,000 restaurants and has plans for another double-digit expansion in locations this year, as well. Eventually, growth by simply opening new locations will hit a wall.
You have to believe that both the food poisoning concerns will dissipate quickly and that CMG can open 200-plus stores annually to great immediate success to trust this stock here. That’s a tall order given recent history and the still-inflated forward P/E of over 30.
Value Traps That Are NOT Bargains: International Business Machines Corp. (IBM)
IBM (IBM) has not pleased investors in the last year, with a 20% decline in the past 12 months. But despite topping estimates in its January earnings report, the future remains just as bleak for this tech giant.
That’s because while IBM has managed to meet expectations recently, those expectations are far from rosy. Revenue declined yet again for Big Blue, and its 2016 outlook shows much of the same.
And when your sales have marched steadily lower for 15 straight quarters, from $104.5 billion in fiscal 2012 to $81.7 billion in fiscal 2015 … it’s time to show Wall Street something new.
Bulls will continue to point to cloud computing revenue, but that remains just 12% of total sales. And as its legacy businesses continue to decline, the growth here clearly has not been enough to prop up the numbers for the entire company.
There may eventually come a time when the old segments have finished their decay and new segments of IBM have enough power to make this tech company attractive. But that moment has not yet come, and recent earnings are proof.
Value Traps That Are NOT Bargains: Chesapeake Energy Corporation (CHK)
One of the many battered oil stocks out there, Chesapeake Energy Corporation (CHK), is down a staggering 90% in the last 12 months. And some investors who think that oil may inevitably rebound are bargain hunting in this battered pick.
For starters, there is no guarantee that oil will go significantly higher anytime soon. Demand trends are flat worldwide given the slowdown in China, and on the supply side, both the governments of the OPEC cartel and small-cap American oil producers are committed to pumping as much oil as possible simply to pay their debts and keep the lights on. We may see a brief rebound in oil, but forget about $50-plus crude anytime in the next year or so.
Secondly, Chesapeake is not simply caught up in the downtrend in energy, but perhaps the worst example of how cheap oil can threaten a once-profitable firm with insolvency. CHK has eliminated its dividend recently after deep losses and the prediction of continued earnings shortfalls in 2016. Furthermore, Standard & Poor’s downgraded CHK’s credit rating from B to CCC+ — deep in junk territory – with a negative outlook.
Bargain hunting in turnaround plays is all well and good, but nothing has materially changed about CHK’s underlying business, and it is a bit naïve to simply expect oil to jump $10 a barrel and fix all of Chesapeake’s problems.
Value Traps That Are NOT Bargains: Wynn Resorts, Limited (WYNN)
The past two years have been ugly for casino giant Wynn Resorts (WYNN). Shares are down more than 75% in the past 24 months, and down more than 50% in the past year.
But don’t think this means the worst is over. After all, the reason for Wynn’s big growth in the early part of this decade was its efforts in China’s gambling mecca Macau … and economic woes in Asia have taken a big bite out of gaming. Furthermore, there has been a continued focus on corruption in the gambling industry in Macau adding salt to the wound, starting with a huge crackdown on Macau in mid-2015.
One of Macau’s biggest operators just announced in late 2015 that it may have to close operations if the drought continues.
Unless the fundamentals of China’s economy change — which doesn’t seem likely anytime soon — Wynn will continue to see pressure.
The numbers are understandably ugly as a result. A preliminary look at Q4 numbers showed a 26% drop in net revenues, and a 50% dip in profits. Furthermore, December marked the 19th consecutive month of falling revenues overall for Macau gaming.
The final nail in the coffin is Wynn’s rising debt level that has been incurred as a result of heavy construction efforts. When your company is valued at $5.7 billion but you’re sitting on $8.8 billion in debt, you have to have good fundamentals and decent growth prospects for investors to have faith.
Wynn simply doesn’t.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.