I’m on the fence when it comes to seeking out stocks to sell, because I’m on the fence about how stocks in general will perform in 2017.
Obviously, President-elect Donald Trump is an unknown factor whose ability to move the markets beyond the rally that followed his victory in the Nov. 8 election is going to depend on the policies he introduces over the next few months.
“It’s been such a significant run-up (in the markets) that there’s been a pause,” BB&T Wealth Management Vice President Bucky Hellwig recently told Reuters. “We are to the point now where there’s uncertainty with regard to what policies are implemented, when are they implemented and how they are going to affect the economy as a whole and industries specifically.”
The other X-factor in any assessment of stocks is how much longer the bull market can run. It’s already the second-longest in history. As we enter the ninth year of this current bull market, positive earnings surprises on a grand scale are likely the only thing that will keep stocks moving higher.
I count 80 stocks with market caps of $2 billion or higher that have seen their share prices double in the past year. I’m sorry if you hold any of them, but some of them simply won’t maintain that momentum.
As earnings continue to pour in, here are seven stocks to sell before they implode.
Stocks to Sell Before They Implode: Avon Products (AVP)
It’s hard to believe that Avon Products, Inc. (NYSE:AVP) is still trading given the troubles it has faced in recent years. It seems like eons ago that former CEO Andrea Jung was at the helm and its business was booming.
Today, despite its stock being up 130% over the past year, AVP trades at less than $6 per share and has a market cap of $2.4 billion — well below its $16.9 billion market cap in 2007, which was a little more than halfway through Jung’s 12-year run as CEO.
Avon’s stock has gained in the past year as it implements a transformation plan to reverse five consecutive years of losses. Also, it sold off 80% of its North American business in March 2016 to Cerberus Capital Management for $170 million and the investment of $435 million by Cerberus in AVP. This transaction accounts for some of the declines in Avon’s market cap, which stood at $4 billion as recently as the end of 2014.
Avon is looking to cut $350 million in costs over the next three years. While that, along with the de-consolidation of its Venezuelan operations from the income statement, should return the company to profitability, any future earnings report that fails to meet analyst expectations — especially in terms of revenue growth — will be met with derision by investors as its stock is priced to perfection.
CEO Sheri McCoy is optimistic about Avon’s future. While I don’t doubt things are getting better at the direct seller, it’s a long way from being out of the penalty box.
Stocks to Sell Before They Implode: Nvidia (NVDA)
I recently discussed some of the worst values on Wall Street, and among the winners (or losers, depending on how you look at it) was Nvidia Corporation (NASDAQ:NVDA), a tech-industry darling whose command of the computer graphics market has resulted in tremendous growth for the Santa Clara-based company.
Analysts love it, investors love it, gamers love it. It’s for this reason that its stock is up 275% over the past 12 months — almost six times the performance of its semiconductor peers, which themselves have traded enthusiastically.
My problem with Nvidia isn’t the company or even its financial results. It’s simply the nosebleed valuation I believe is just aching for an adjustment.
InvestorPlace contributor Laura Hoy believes NVDA stock is still a buy given some of the megatrends it’s a part of. She’s definitely not wrong to think that way. Investing is all about emotions; autonomous vehicles, cloud computing and gaming are three of the biggest trends to hit the tech industry in many a year.
But again, thinking about Warren Buffett’s statement, “Price is what you pay, the value is what you receive,” investors increasingly are paying more for NVDA stock and getting less and less value in return.
Has Nvidia breached the margin of safety value investors desire to protect themselves from unforeseen events affecting its stock price?
At almost 11 times sales, I’d say it has.
Stocks to Sell Before They Implode: Clovis Oncology (CLVS)
Dec. 19, 2016, was a watershed day for Clovis Oncology Inc (NASDAQ:CLVS).
CLVS received an early Christmas present from the FDA, as its advanced ovarian cancer drug Rubraca (rucaparib) was given early approval by the agency because it’s a drug that helps treat a life-threatening disease. Under the FDA’s accelerated approval program, Clovis got the green light two months earlier than accepted.
Investors were giddy about the news, sending CLVS stock up almost 9% in daily trading. But that’s just the tip of the iceberg. Clovis’ stock has been on fire since the end of October, when the company reported a non-GAAP loss of $65.7 million, 33.4% lower than in the same quarter a year earlier.
That got things moving. The stock is up almost 90% since Oct. 31, 2016.
However, while the news is good, Donald Trump seems ready to ruin the party. On Jan. 11, the President-elect came down hard on the biotech industry, suggesting it’s gouging customers and manufacturing drugs outside the U.S. Trump wants both practices to stop, and that could have serious consequences for Clovis, whose operating losses have exceeded $700 million over the past five years. Lower drug prices mean lower profits, which means a slower path to profitability.
Any bad news on this front will definitely put a hurt on CLVS stock.
Stocks to Sell Before They Implode: Hancock Holding Company (HBHC)
Mississippi’s Hancock Holding Company (NASDAQ:HBHC) owns both the Whitney Bank and Hancock Bank names and operates in six different states, including Florida and Louisiana.
The regional bank announced its fourth-quarter 2016 earnings Jan. 18, and while they were generally positive, there were a couple of misses on its dance card that could signal the end of HBHC’s strong performance on the markets.
First, Q4 revenue was up 7.2% to $233.7 million. That’s the good news. Unfortunately, it didn’t meet the analysts’ estimate of $234.8 million. A small miss, I’ll grant you, but when a regional bank stock has doubled over the prior 52 weeks — by its comparison, its peers gained 47% over the same time frame — investors are going to expect that bank’s ducks to all be in a row.
The second little hiccup involved earnings. Analysts were expecting $1.89 in EPS in Q4 2016, but HBHC came in 2 cents shy. Again, that’s not a problem in and of itself. But given that Hancock’s price-to-earnings ratio of 30 is almost 56% higher than its five-year average, any miss probably will be interpreted badly by investors.
Hancock recently announced that it was buying nine bank branches from Louisiana bank First NBC along with $1.3 billion in loans. The move adds to its market share in the greater New Orleans market, where it’s an official bank of the New Orleans Saints.
The bank itself doesn’t seem to have any problems. But at a 3.3% earnings yield, HBHC’s valuation is just too darn high. Especially when you consider that JPMorgan Chase & Co. (NYSE:JPM) has an earnings yield that’s double Hancock’s, and a bigger dividend yield at 2.3%, compared to HBHC’s 2.1%.
Hancock is priced for zero mistakes.
Stocks to Sell Before They Implode: Fairmount Santrol Holdings (FMSA)
I would have picked Clayton Williams Energy, Inc. (NYSE:CWEI) because it was up 300% in 2016, finishing the year with a market cap over $2 billion. Well, that ballooned Jan. 17 on news Noble Energy, Inc. (NYSE:NBL) was acquiring the independent oil and gas company for the equivalent of $139 per share.
The second-best performing stock among Finviz.com’s list of 80 stocks that are up 80% over the past year is Fairmount Santrol Holdings Inc (NYSE:FMSA), a provider of sand and sand-based products to the oil and gas and industrial markets. FMSA has achieved a total return of 740% over the past year through Jan. 17.
It’s off to a good start in 2017, up 6.3% year-to-date. However, despite the improvement in the markets it operates in, it’s still losing money on an adjusted EBITDA basis.
Any good news heading into 2017 has been factored into the price of its stock.
Stocks to Sell Before They Implode: Advanced Micro Devices (AMD)
Advanced Micro Devices, Inc. (NASDAQ:AMD) has the unlucky task of competing against Nvidia. That really hurt its business in 2015, but if the 385% total return over the past 12 months is any indication, 2016 was substantially better.
This past year, AMD raised a total of $1.4 billion in cash by issuing $600 million in equity and $805 million in 2.1% convertible notes due in 2026. With cash in hand, it repaid $1.2 billion of its more expensive debt, lowering its average interest rate by 230 basis points to 4.9%.
In addition, AMD has had some success stories in 2016 when it comes to products including Ryzen, its new CPU, and Vega, its high-end GPU. These victories led to top-line revenue growth and could be just what the doctor ordered on the profitability front.
Cautiously optimistic would be one way of looking at the company as it heads into 2017.
However, when you’re generating 11% year-over-year revenue growth while your much bigger, darling of a tech stock (Nvidia) is boosting the top line five times as quickly, you really have to wonder if it’s worth paying almost 2 times sales for an unprofitable company. Especially when you can get NVDA for 10 times sales, and it makes $1.2 billion in net income.
I think both NVDA and AMD are stocks to sell thanks to their riskiness. But if I had to choose between Nvidia and AMD as the stock most likely to implode due to an unsustainable valuation, it would be AMD hands-down.
Stocks to Sell Before They Implode: HealthEquity (HQY)
Although HealthEquity Inc (NASDAQ:HQY) is considered a technology stock, it’s really a healthcare company that uses technology to service its 2.4 million health savings accounts (HSAs) and $4.3 billion in assets under management.
HQY has about 12.1% market share in the HSA market — 750 basis points less than UnitedHealth Group Inc (NYSE:UNH), one of the nation’s largest providers of health care benefit plans and healthcare services.
Under a Trump presidency, it’s expected that HSAs will become a big part of whatever changes are made to the U.S. healthcare system to replace the Affordable Care Act. That downside of this reality is they come with health plans that have high deductibles, partly defeating the purpose of the HSA in the first place.
Whatever happens, under UNH you get diversified growth over various segments of its business that are delivering double-digit increases in quarterly revenues and operating earrings.
Should HSAs not gain as much favor with the Trump healthcare team, UNH is in a much better position than HealthEquity. That said, HQY is growing at 40%-50% per quarter, so you’d expect a higher valuation multiple.
However, HQY is up more than 110% for the past year, and 20% year-to-date. Its forward P/E is way too rich a price to pay and will experience some serious volatility once the details of the new healthcare plan are revealed by President-elect Trump.
Besides, why pay 76 times earnings for something growing at 40% when you can have UNH at 17 times earnings growing at 20%?
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.