The first quarter of 2016 has been volatile, with the S&P 500 finishing the period down just 1% after being off as much as 10% at one point in February.
Needless to say, U.S. equity prices have been all over the place. There are a handful of stocks that have been mostly higher throughout, however, and are up significantly in 2016.
Problem is, not all of these stocks are deserving of these gains, and could be presenting a value trap to investors who are trying to chase gains in a volatile, unpredictable market.
When I look throughout the market, I count nine stocks that fall in this trap, and investors should probably breakup with them by the end of March.
Hot Stocks to Dump: Groupon Inc (GRPN)
Groupon (GRPN) stock is down 20% from a year-to-date high it set back in early March, but despite this pullback the stock is still 30% for the year.
Yes, Groupon’s most recent quarter was decent, with North American billings up 10% and its e-commerce, or Goods, revenue was also up 10%. However, it’s just one quarter, and GRPN has had many bad quarters to push its stock down 85% since its IPO late 2011.
And don’t forget that Groupon’s total billings did decline 1% during that “decent” quarter that sparked these big gains.
At 10 times last year’s free cash flow, GRPN stock isn’t necessarily expensive, but there are still legitimate questions surrounding its chances of longevity and whether it can continue to grow Goods revenue and increase margins. Given these facts, don’t be surprised if GRPN stock takes a breather after a very strong start to 2016.
Hot Stocks to Dump: Chesapeake Energy Corporation (CHK)
Chesapeake Energy (CHK) stock is down 3% for the year, but over the last month CHK has jumped a whopping 62%. Ironically, what sparked these gains was a series of headlines that began with winning immunity in an antitrust case and ended with the presumed suicide of former CEO Aubrey McClendon.
Since then, the potential for asset sales and a short squeeze have helped CHK stock maintain the gains it created in the early days of March. However, what’s really telling about CHK as an investment is that even with crude oil prices recovering to near $40, the company is nowhere near operating at a profit.
During Chesapeake’s last quarter its operating margin was negative 66%, and its debt-to-assets ratio has doubled to more than 60% over the last year alone. Hence, CHK can not operate efficiently in this current environment, and that’s why its stock fell 77% last year.
Given that nothing on this front has changed, CHK stock could easily retest its previous lows just as fast as it has risen the last month.
Hot Stocks to Dump: Marathon Oil Corporation (MRO)
Much like Chesapeake, Marathon Oil (MRO) is another oil & gas company that can not operate at a profit in this current environment, due to its lack of diversity in the industry.
Yet despite this fact, shares of MRO have soared 42% in the last month behind mostly a short squeeze, and because MRO bought itself a little more time after a successful public offering that created more than $1 billion in new capital.
Like many oil & gas companies, investors are just hoping that MRO can wait out the low oil prices, and that oil prices recover. While MRO does not have the balance sheet woes of CHK, there is no reason to believe that crude prices can effectively double at any point in the near future, thereby allowing MRO to operate at a profit.
As a result, don’t be surprised if MRO follows CHK and gives back many of the gains it created in March, with crude oil prices having a hard time holding $40, and MRO unable to thrive in such an environment.
Hot Stocks to Dump: Coach Inc (COH)
Michael Kors Holdings Ltd (KORS) was deserving of the gains it created in 2016, but Coach (COH) is not.
COH soared 17% in the first quarter after it grew revenue 4% during its last quarter. The problem is that Coach’s growth comes behind two consecutive years of revenue declines, including a double-digit decline last year.
Yet, KORS has done nothing but grow, every quarter and every year. With COH trading at 29 times earnings, it is a pricey stock, especially compared to KORS with a P/E multiple of just 12.
Sooner or later, investors will realize that COH is the laggard of high-end handbags, and is too expensive with misleading growth.
COH had a good run in Q1, but I expect those gains to fizzle away in the months ahead.
Hot Stocks to Dump: Tyson Foods, Inc. (TSN)
It’s no surprise that investors have gravitated to stocks like Tyson Foods (TSN) during a volatile quarter. Such companies are often seen as safety plays, a narrative that has pushed TSN higher by nearly 25% in 2016.
The fact that pricing for poultry is strong coupled with lower feed costs have contributed in the gains, pushing margins higher for the company.
However, TSN lacks top-line growth with an expected loss of 8.6% this year, does not pay a high dividend, and has become pricey at 20 times earnings after a 70% gain over the last 12 months.
As a result, its time for a pullback in TSN stock, and with a yield under 1%, there’s no reason to hold TSN through the volatility. Thus, expect the high times to end sooner than later.
Hot Stocks to Dump: Freeport-McMoRan Inc (FCX)
Freeport-McMoRan (FCX) is up 46% this year after a horrid 12 months. Investors seem to like that copper prices have increased to some degree, and that the company is cutting production on copper to meet demand. Yet, because there is so much supply, management says not to expect a proper balance until at least 2017.
With that said, FCX has struggled for years, first with pricing and now there is the larger threat of economic slowdown and a decline in industrial production and construction spending in key markets like China.
In retrospect, the company’s debt-to-asset ratio continues to rise, and its plan to sell assets to meet debt obligations will be difficult in a weak commodity pricing environment.
These are all things that investors should soon realize, and will weigh on FCX stock.
Hot Stocks to Dump: Domino’s Pizza, Inc. (DPZ)
Domino’s Pizza (DPZ) is clicking on all cylinders. During its last quarter, total revenue grew 15% and its domestic comparable sales increased more than 10%.
That’s incredible for a well established restaurant, and while the outlook remains bullish with expected growth of 7% this year and 8% next year, its stock gains of 17% YTD seem a bit stretched.
This is a stock that has soared more than 600% over the last five years, and now trades at a whopping 27 times FY2017 EPS.
Yes, DPZ deserves a valuation premium compared to its industry, but such a stretched multiple leaves very little remaining upside and significant downside. When you couple this with high expectations and very little room for error, DPZ is a stock that looks poised for a reversal sooner than later.
Hot Stocks to Dump: ViaSat, Inc. (VSAT)
ViaSat (VSAT) has traded higher by 18% this year, adding more than $500 million to its market capitalization. The company is known as a best in class satellite internet service provider, boasting the best speeds, but prices that are quite expensive in this current environment.
The reason for its big gains this year relate to a bigger jump into the airline/in-flight connectivity market. ViaSat’s system is reportedly faster than current market leader GoGo Inc (GOGO).
However, GOGO trades with a market cap of $900 million and dominates the industry. The fact that VSAT has added $500 million in market cap on pure speculation seems like a bad bet for investors headed into Q2.
In other words, the bet on VSAT is premature.
Hot Stocks to Dump: Fossil Group Inc (FOSL)
Fossil (FOSL) has seen a big reversal, jumping 50% from its low back in mid-January. While most of those gains came in response to earnings, investors must keep in mind that FOSL is still down 46% over the last 12-months, and revenue fell 6% during its strong quarter.
The company is losing market share to the likes of Fitbit Inc (FIT) and Apple Inc (AAPL) as it fails to develop relevant products in either the basic or smart wearables market. While FOSL did acquire Misfit to try and stop the bleeding, fact is that AAPL and FIT have built such commanding leads that it will be hard, if not impossible for FOSL to penetrate the market now.
All things considered, I would look at FOSL’s rally more like a dead cat bounce than an actual recovery from strong operating performance.
As of this writing, Brian Nichols does not own any of the aforementioned securities