For some investors this may be a difficult pill to swallow, but not every company that’s still here today is going to be alive and kicking a year from now … at least not as we know them now.
That doesn’t inherently mean a bankruptcy is in the cards (although in some cases it’s a distinct possibility). And, it doesn’t necessarily mean all of these names are stocks to sell. It may mean a huge divestiture of a key division to raise some much-needed funds.
Or, it may mean being folded into a bigger company via an acquisition as a means of survival. For others it may still mean something else entirely.
However it shakes out, look for these companies to fade away for one reason or another by 2018. Here’s the deal.
Stocks to Sell: Sears Holdings Corp (SHLD)
The demise of Sears Holdings Corp (NASDAQ:SHLD) has been plenty well documented, going back as far as 2008. The company has been lopping off pieces of itself to raise much-needed cash, but after years of the practice failing to ever stop the bleeding, the struggling retailer reached “red alert” status this year. One way or another, the end is nigh.
The counter-argument is that Sears has another $2.5 billion worth of assets to sell — if it wants to — that could keep it afloat for a couple more years. Besides, if Sears hasn’t folded yet, why would it do so in 2017?
There’s actually a specific answer to the question.
It’s been a mostly overlooked detail of the company’s sale of roughly 250 locales to a REIT that it now makes lease payments to, but there’s a clock on the deal’s liability. That is, the statute of limitations on a “fraudulent conveyance” claim is two years. Investors who may want to claim the creation of the REIT was simply a vehicle to transfer assets out of the company’s hands before it filed for bankruptcy would need to do so before summer of 2017. After that, the money-losing retailer can file bankruptcy without any conflicting claims to the company’s assets.
And don’t count on the company being able to buy or borrow its way out of trouble this time either. Vendors and lenders have become highly suspicious (and stingy) now that Fitch has said a bankruptcy is likely in two years or less.
Stocks to Sell: BlackBerry Ltd (BBRY)
Last week, once-iconic smartphone maker BlackBerry Ltd (NASDAQ:BBRY) dished out some of the best news it’s been able to give investors in a long, long time. In short, it looks as if the company’s transition from a hardware company to a software company is taking hold.
Last quarter’s software and service sales grew 16% on a sequential basis, and the company believes this arm’s revenue could grow 30% this year. That’s high-margin revenue, too. The company even upped its full-year profit outlook as a result.
But it’s just not enough. Software revenue may have grown to $160 million last quarter, but total revenue fell from $548 million in the same quarter a year earlier to only $289 million in the recently completed third quarter. That’s also down from Q2’s top line of $334 million.
Some investors are concerned the company is buying most of its growth.
Its cash hoard — one of the most compelling pieces of any bullish thesis for BBRY — has also been whittled down, from more than $3 billion a year ago to $2.1 billion now. BlackBerry may have to spend all of the remainder on acquisitions to have a shot at becoming reasonably viable. The fact that BBRY has lost 10% of its value since last week’s earnings report says the majority of investors don’t see any reason to keep the faith.
Stocks to Sell: GoPro Inc (GPRO)
There’s no denying GoPro Inc (NASDAQ:GPRO) makes the best action cameras in the world. Unfortunately, the world doesn’t need very many top-notch cameras. And even if it were a growth market, a plethora of “almost as good” competitors are taking a bite out of GoPro’s business. Never even mind the fact that there’s no real upgrade cycle to speak of.
The proof of the headwind is plainly evident in the numbers. The third quarter’s top line of $240.6 million was down 40% on a year-over-year basis, and the company swung to a loss.
Yes, the introduction of aerial drones and the Hero5 Black in October are supposed to be huge for the company. Analysts expect — or expected — GoPro to report revenue of $592.2 million for the quarter currently underway, which would push the company to a profit of 26 cents per share. That optimistic outlook may not account for the fact that the Karma drone was recalled just two weeks after it hit store shelves, however, and may not account for the fact that the company is shutting down its media arm and has laid off 200 employees of that division. The maneuver is expected to save $650 million next year.
It’s not going to be enough to stop the bleeding, though. Past this holiday shopping season, GoPro’s product line will see even less demand than before. There’s nothing to salvage. Drones won’t help either. The Karma is suspiciously left off most of the “best drones to own” reviews.
Stocks to Sell: Office Depot Inc (ODP)
For the better part of last year and early this year, Staples, Inc. (NASDAQ:SPLS) petitioned to acquire struggling smaller rival Office Depot Inc (NASDAQ:ODP). A U.S. district judge ultimately shot that deal down in May, suggesting consumers would be harmed if competition was eliminated in the office supply retail space.
Regardless of an investor’s stance on the fairness (or unfairness) of the ruling, what not in dispute is that Office Depot is fighting an uphill battle … and losing. Last quarter’s top line was down 23%, and that wasn’t an unusual result.
What’s most alarming, though, is how paper-thin the company’s net margins have become. Over the course of the past four quarters, income has rolled in at only 2.3% of revenue. There’s no room left for revenue to slump any further, but odds are that’s exactly what’s going to happen.
Stocks to Sell: Tidewater Inc. (TDW)
Of all the names on this list, oil services outfit Tidewater Inc. (NYSE:TDW) is arguably the most endangered, and most vulnerable.
Why’s that? Because back in October, in the shadow of yet another quarterly loss, the company flat out said it may have to file Chapter 11 if it can’t renegotiate its existing debt. It’s not as if oil prices — or demand — have soared in the meantime, though they’re slightly better than they were a quarter ago, when Tidewater lost $89 million, or $1.89 per share.
Just to put things in perspective, TDW shares have fallen more than 90% over the course of the past two years, pulling the market cap down to a mere $171 million. Over the course of the past four reported quarters though, the company has lost $369 million on $714 million worth of revenue.
That’s a huge hurdle to get over.
Stocks to Sell: Groupon Inc (GRPN)
A little over a year ago, then-new Groupon Inc (NASDAQ:GRPN) CEO Rich Williams wrote a heartfelt, if misguided, letter to investors explaining that the poor performance of GRPN stock was rooted in a misunderstanding of what the company was trying to accomplish. With a few tweaks here and there and a rekindled effort to grow “local,” Williams at least appeared confident he could turn the ship around.
Well, here we are a year later. Revenue was up a whole 1% last quarter on a year-over-year basis, and the company is still bleeding money … at a faster pace. Analysts aren’t expecting to see any real progress for the current quarter either.
That’s not to say there’s not been change. There has been change. The company had $963 million worth of liquid assets in the bank a year earlier, and now it’s only got $690 million. It’s dwindling fast.
If there was any shred of a reason to think Groupon, under Williams, could stage a successful turnaround, one could make the argument that the company should be allowed to buy itself time. There’s just no evidence to that end, though. A level-headed reality check sooner than later should suggest Groupon sells itself on its terms — while it can — before it’s dead broke and forced to sell itself on the suitor’s terms.
Stocks to Sell: Valeant Pharmaceuticals Intl Inc (VRX)
Last but not least, though Valeant Pharmaceuticals Intl Inc (NYSE:VRX) put up a valiant fight, it’s just too mortally wounded to survive as is.
The saga is a sordid one. Here’s the condensed version: Valeant Pharmaceuticals took on too much debt to acquire specialty pharmaceuticals, and the company reached its tipping point late last year. Shortly after that, infamous short-seller Andrew Left suggested the company’s fiscal success was fudged partly thanks to a questionable relationship with one of its specialty pharmacies.
During that time, the outrageous pricing of specialty pharmaceuticals was finally called into question, putting the company and its business model in an uncomfortable light. A new CEO was named, but he inherited a debt bomb at a time when Valeant has lost a massive amount of pricing power. The math no longer makes sense.
That’s not suggesting Valeant is going to bankrupt — the company can sell pharmaceutical IP or entire divisions to pay down its debilitating debt. In fact, it’s already tinkered with the idea of shedding its Salix brand, which it only acquired in early 2016.
It’s hardly an ideal step, though. Not only will a sale of assets crimp the company’s ability to drive revenue, but Valeant probably won’t even get back what it paid for Salix or its other ill-advised purchases.
Thing is, the company’s habitual losses now don’t give Valeant much of a choice. It’s going to have to liquidate some of itself — and maybe most of itself — just to survive. Valeant is going to look much different when that happens.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.