The 10 Biggest Stock Market Failures of 2016 

Stock - The 10 Biggest Stock Market Failures of 2016 

Source: brain.centipedes via Flickr (modified)

The broader markets motored ahead in the weeks following Donald Trump’s Nov. 8 election victory, with both the S&P 500 and Dow Jones Industrial Average seemingly setting record highs on a daily basis.

The 10 Biggest Stock Market Failures of 2016

With the Dow and S&P 500 up 13% and 10.2% respectively through Dec. 9, both indexes are on course to deliver another positive year for investors.

On a scale of 1 through 10, 2016 would have to be rated a 7 by investors, which is good but not great, an indication that not everyone was totally enthralled by stocks this past year.

Some sectors won while others lost. Energy stocks rebounded in 2016 while healthcare stocks reversed their course, delivering the first year in negative territory since the 2008 financial crisis.

Amidst all that jockeying for position were some colossal stock market failures.

While negative returns help get a stock on the list, equally important is how a stock falters. It’s about style and substance. And of course, there are those misunderstood stocks that were expected to take flight this year but never got off the ground. These failures are especially disappointing.

Like a Super Bowl-caliber football team that fails to make the playoffs, it’s the underachievers that truly belong on a list of the 10 biggest stock market failures of 2016.

Stock Market Failures, Basic Materials — Diamond Offshore Drilling (DO)

Stock Market Failures, Basic Materials -- Diamond Offshore Drilling (DO)

Source: Courtesy of Diamond Offshore Drilling (Modified)

Diamond Offshore Drilling Inc (NYSE:DO) stock got a bit of a bounce in November when OPEC agreed to cut daily production by 1.7 million barrels, the first bit of good news the 53%-owned subsidiary of Loews Corporation (NYSE:L) has had in many months, if not years.

Unfortunately, the good news might not last.

First, the OPEC cuts are contingent on non-OPEC nations like Russia also cutting daily production by 600,000 barrels. The odds of that happening are not very good. Then, even if all of these cuts stick, oil prices might not go beyond $52 per barrel, according to market commentator Dennis Gartman, which leaves DO stock staring down the barrel (no pun intended) of a fifth-straight year in negative territory.

Worse still, even if prices move higher than $52, offshore drillers are likely to be the last to benefit from higher oil prices. Add to that $2 billion in long-term debt, very little cash to pay down debt and no earnings to speak of, and it all suggests things could get even worse for DO shareholders before they get better.

Amazingly, despite the bad news, Loews has had its best stock performance since 2013, up 23% year-to-date.

Stock Market Failures, Consumer Goods — Mondelez (MDLZ)

Stock Market Failures, Consumer Goods -- Mondelez (MDLZ)

If at first, you don’t succeed, try, try, again.

That pretty much sums up the year for Mondelez International Inc (NASDAQ:MDLZ), the maker of Oreos and Cadbury chocolate bars. Its unsuccessful attempt to wrestle Hershey Co (NYSE:HSY) from the Hershey Trust was a colossal bust, turning summer gains into fall declines for a stock that has woefully underperformed the S&P 500 over the past five years.

Mondelez CEO Irene Rosenfeld told Hershey management that she was willing to pay $115 per share to acquire Milton Hershey’s gem. The trust said it wouldn’t consider anything less than $125.

In July, I recommended Hershey sell itself for $160 per share. Rosenfeld never got anywhere close to that and now she’s left cutting costs in order to deliver value for MDLZ shareholders.

Even worse, Mondelez’s failure to buy Hershey may have put the company in the crosshairs of 3G Capital, the people behind Kraft Heinz Co (NASDAQ:KHC). 3G is in middle of raising up to $10 billion for a new private equity fund with the intention of making an acquisition for Kraft Heinz. Cost cutters at heart, 3G would swiftly remove Rosenfeld from the top job.

Not a minute too soon, in my opinion.

Stock Market Failures, Financials — Invesco (IVZ)

Stock Market Failures, Financials -- Invesco (IVZ)

Financial stocks of every description have had a renaissance year in 2016. As a group, the 90 financial stocks in the S&P 500 have averaged a year-to-date return of 21% through Dec. 8. Asset managers, of which there are 10 in the index, have had to settle for an average YTD return of 14.5%.

Yet Invesco Ltd. (NYSE:IVZ), whose PowerShares ETFs play in one of the biggest growth stories of the 21st century, could barely manage to deliver positive returns for shareholders, up 2%.

Invesco not only underperformed peers in 2016, it has done so in three of the last five years.

A quick look at IVZ’s revenues and profits through the first nine months of the year suggests that its business is doing alright in an extremely competitive marketplace, and although its adjusted operating margins contracted by 170 basis points in the quarter to 39.7%, Invesco’s stock likely deserved better in 2016.

The performance of IVZ stock this past year is less a failure than a disappointment. It’s a well-run business whose stock has simply gone out of favor with investors.

Stock Market Failures, Healthcare — Allergan (AGN)

Stock Market Failures, Healthcare -- Allergan (AGN)

The pros seem to love the drug company; retail investors, not so much. That’s got Allergan Plc (NYSE:AGN) stock down 39.7% year-to-date and 22% in the last three months alone.

Jim Cramer said in the summer that Allergan stock was being held back by the company’s pending deal to sell its generics business to Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) being held up by FTC approval. It got that approval shortly after Cramer’s comments with absolutely no positive effect on its stock, which continued to tumble throughout the summer and into the fall.

Piper Jaffray analyst David Amsellem and his team believe the root cause of Allergan’s stock troubles lies in the failure of its commercial drug portfolio in the U.S. to grow prescription volumes which are down 7.2% year-to-date with a real possibility that it will see similar declines in 2017.

Don’t feel too bad if you’re an Allergan shareholder. The healthcare sector has been the worst performer in the S&P 500 year-to-date, down 5.9% through Dec. 8, one of only two sectors in the red in 2016.

Stock Market Failures, Industrial Goods – Stericycle (SRCL)

Stock Market Failures, Industrial Goods - Stericycle (SRCL)

This medical waste disposal company hit the wall in 2016 and shareholders paid the price; Stericycle Inc (NASDAQ:SRCL) stock is down 39%.


Stericycle has acquired more than 400 companies over the past 23 years as it has grown from being a small medical waste company into a health, safety and compliance expert with business solutions other than those geared towards its traditional market.

Revenues have soared but so has the long-term debt which has grown to $2.9 billion and 45% of its $6.4 billion market cap. By comparison, Waste Management, Inc. (NYSE:WM) has $8.8 billion in debt but that represents just 28% of its $31 billion market cap, a much more reasonable number.

Despite the company expecting earnings to decline in 2017, Stericycle continues to look for more acquisitions, which will only add to its debt, making its stock even more of a precarious bet moving forward.

You have to feel for shareholders who don’t have much to show for keeping the faith over the past five years. It might be time to get off this cycle.

Stock Market Failures, Services – Chipotle (CMG)

Stock Market Failures, Services - Chipotle (CMG)

Chipotle Mexican Grill, Inc. (NYSE:CMG) stock is down 23% year-to-date on top of a 29.9% decline in 2015, mostly caused by an E. coli outbreak that forced the company to address its operational procedures at its stores, which are slowing down service.

Where it used to introduce approximately eight new operational procedures a year, it has already introduced 80 since Q4 2015. That’s led to high employee turnover and a poor customer experience. Co-CEO Steve Ells didn’t leave much to the imagination Dec. 6 when describing his restaurant’s inability to improve customer service.

“I’m not satisfied with the rate of recovery,” Ells said during a Barclays investment conference in New York. “I’m particularly not satisfied with the quality of experience in some of our restaurants.”

Chipotle management rates at least half its 2,000 restaurants C, D or F, a statistic that could cause permanent damage to its brand and, by extension, its stock price.

While investors thought the E. coli outbreak would kill CMG stock, it appears a stronger economy is doing the same thing.

Stock Market Failures, Technology — Alphabet (GOOGL)

A year ago, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) changed the way it is structured so that Alphabet would become the public holding company while the search business became a wholly owned subsidiary of Alphabet. The move was meant to free some of the most entrepreneurial parts of the Google empire to thrive independent of its legacy business.

One year later, Google Trends data suggests that almost no one cares about the Alphabet name, with some suggesting the move was a brilliant scheme to shield Google’s more controversial efforts from investor scrutiny. After all, if you’ve never heard of Alphabet, how are you going to doing any research on it?

Great idea in theory but you’ve seriously got a problem when a company that generates $23.5 billion in free cash flow over the trailing 12 months can only muster a year-to-date return of 2.2%.

Google or Alphabet or whatever you want to call its stock isn’t performing as it should given its financial prowess. Like a Porche that’s never driven above 30 miles per hour, GOOGL stock is meant to be driven to the limits.

By my reckoning, Alphabet is the biggest stock market failure of 2016.

Stock Market Failures, Utilities — FirstEnergy (FE)

Stock Market Failures, Utilities -- FirstEnergy (FE)

The S&P 500 utilities sector is having a solid year up 8.8%. Of the 29 utilities held by the index, all but one are in positive territory through Dec. 8.

The only laggard? FirstEnergy Corp. (NYSE:FE), a utility with operations in the midwest and mid-Atlantic that’s transitioning to a fully regulated business model.

A big headwind on its stock price has been the threat of bankruptcy for its competitive business. While the company is pursuing all options, including the sale of assets to speed the transition, the uncertainty of what it will look like afterward is definitely keeping investors away.

The one bright spot: More hedge funds are currently buying FirstEnergy, suggesting that at least some investment professionals believe FE stock is undervalued at the moment.

Stock Market Failures, Wildcard A — L Brands (LB)

Stock Market Failures, Wildcard A -- L Brands (LB)

The Victoria’s Secret Fashion Show aired Dec. 5 on CBS, a star-studded affair featuring performances from Lady Gaga, Bruno Mars and The Weekend, and a reminder how far the specialty lingerie retailer has come since Leslie Wexner bought the L Brands Inc (NYSE:LB) chain for $1 million back in 1982; the rest is history.

Fast forward to 2016.

Leslie Wexner moves to reinvent its business starting with the resignation of long-time Victoria’s Secret CEO Sharen Jester Turney. The veteran retailer feels that brands grow stale after a decade or so; Turney had been in the top job since 2006, so it was definitely time to make changes.

Investors used to market-beating returns — LB’s annualized total return over the last 10 years is 12.7%, 562 basis points higher than the S&P 500 — rushed to the exits. Not entirely surprising given its stock nearly doubled over the two-year period leading up to Turney’s departure.

The uncertainty combined with significant capital gains made the choice a relatively simple one for a lot of investors, and down went its stock price. Losing 17% year-to-date, LB stock is simply reloading for the next big run. This past year hasn’t been a failure so much as a realization that times change.

Look for good things from LB stock in 2017.

Stock Market Failures, Wildcard B — Tractor Supply Company (TSCO)

Stock Market Failures, Wildcard B -- Tractor Supply Company (TSCO)

The worm definitely turned at Tractor Supply Company (NASDAQ:TSCO) in 2016, as big-ticket items went begging at its stores located in the energy and agricultural hotspots across the country.

In early September, TSCO warned that its third-quarter same-store sales would be flat or down 1% in contrast to rising 2.9% in the same quarter a year earlier. Originally it projected same-store sales growth in fiscal 2016 would be at least 2.5%; that has been scaled back to 1.7% at the high end of the range.

Investors did not take kindly to the revised guidance pushing its stock down by more than 17% in a single day’s trading. Down 9.4% year-to-date, TSCO stock is on pace to deliver its first losing year since 2007 — it gained 0.6% in 2008 when S&P 500 lost 37% — something long-time shareholders have become unaccustomed to.

Long-term, however, Tractor Supply’s move into small-town pet stores with the $116 million acquisition of Petsense, a chain of 136 stores across 25 states, cements its position as the leading specialty retailer in small towns across America.

Even the best stocks get knocked off stride once in a while.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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