Trying to predict where broad markets are going to go usually is a bit of a fool’s errand. At the moment, it seems downright impossible.
After all, there are a lot of investors and observers calling the market overvalued. By many measures, earnings multiples are at their highest since before the financial crisis.
But at the same time, there are signs of life in the U.S. economy. Consumer and CEO confidence levels both have improved. Prices of commodities like copper and steel are rising, indicating demand ahead of construction projects.
Where the market will go from here is anyone’s guess. The best an investor can do is pick quality companies and ride out whatever storms can do. But in this market, there are stocks to avoid — no matter what happens in the macro environment or in the broad market. After all, an important part of investing is avoiding big losses.
Which is why you should steer way clear of these seven losers, which are easily among the worst stocks to buy right now:
The 7 Worst Stocks to Buy Now: Sears Holdings (SHLD)
One of the most incredible developments in the long decline of Sears Holdings was last week’s decline based on a “going concern” warning in the company’s 10-K. Surely even SHLD bulls had to understand the company’s precarious financial condition.
Sears management itself has endlessly discussed its capital cushion. The company has sold off its Craftsman brand to Stanley Black & Decker, Inc. (NYSE:SWK) and put real estate into REIT Seritage Growth Properties (NYSE:SRG).
The 12% selloff in response to a simple bit of a legalese shows just how flimsy the bull case for SHLD is. It also puts into context flash rallies like Monday’s — one of many that saw traders push Sears higher by double digits on a wisp of news. But SHLD always comes back to earth, and with the company running out of assets and real estate to sell, future “going concern” warnings seem guaranteed.
In the end, Sears stock still seems headed for zero.
The 7 Worst Stocks to Buy Now: Melco Crown (MPEL)
Gaming revenue in Macau has steadily improved over the last few months, and that’s led to gains for stocks of operators in the region, among them Melco Crown Entertainment Ltd (NASDAQ:MPEL). Indeed, MPEL stock now is up over 70% from lows in late June, with optimism toward casino legalization in Japan giving the stock another leg up of late.
The gains are simply too much. In Macau, Melco’s Studio City is competing with properties from global giants like Las Vegas Sands Corp. (NYSE:LVS) and Wynn Resorts, Limited (NASDAQ:WYNN). Meanwhile, fourth-quarter results disappointed, as Studio City “cannibalized” revenues from existing Melco properties.
The market has shrugged off the miss, and already turned its sights to opportunities in Japan.
The problem for MPEL stock is that any opportunity in Japan isn’t guaranteed: The company will be competing with Las Vegas Sands and MGM Resorts International (NYSE:MGM), among others. Even should Melco win, it would likely be a minority partner in any venture, and any profits it would receive are likely at least five years off.
In the meantime, Melco traditionally has underperformed in Macau. And the contradiction between the optimism toward Macau stocks and the general skepticism toward the Chinese economy seems likely to give at some point.
It certainly looks like investors are looking at potential rewards in the distance and ignoring risks right under their nose.
The 7 Worst Stocks to Buy Now: Vera Bradley (VRA)
It might be a bit unfair to single out Vera Bradley, Inc. (NASDAQ:VRA), because investors should avoid pretty much every mall-based retailer at this point.
Abercrombie & Fitch Co. (NYSE:ANF) posted a Q4 earnings beat in March, rose 13%, and lost those gains in barely a week. GameStop Corp. (NYSE:GME) is a mess. So are Buckle Inc (NYSE:BKE) and Express, Inc. (NYSE:EXPR).
But even in that challenged group, Vera Bradley stands out.
Revenue and earnings have declined for four consecutive years, and the company is guiding for a fifth straight drop this year. Margins are collapsing, and the company is not far from becoming unprofitable. Handbag demand already is down — see results at peer Michael Kors Holdings Ltd (NYSE:KORS) — and Vera Bradley appears to be losing share in a declining business, a toxic combination.
And yet, VRA still trades at 12x the midpoint of this year’s guidance plus cash — a multiple that suggests the company should stabilize earnings reasonably soon. There’s no evidence of that stabilization, however. And there’s no reason to think VRA stock will do anything but continue to decline.
The 7 Worst Stocks to Buy Now: MannKind (MNKD)
MannKind Corporation (NASDAQ:MNKD) long has been a favorite of retail investors. Institutional ownership in the stock is below 20%. The company has done little to dissuade those retail investors, and in fact done the opposite. To its credit, the company even publicly answers questions from individual investors on its website.
The problem is that most of those investors have lost a lot of money on MNKD stock. Even after a 1-for-5 reverse split earlier this month, MannKind trades below $2. And the stock has declined 97.5% in the last decade.
Unfortunately, it doesn’t seem likely to get any better. The company’s core Afrezza inhalable insulin product simply isn’t selling, with significant concerns about efficacy and patient adherence. A touted partnership with Sanofi SA (NYSE:SNY) has come to an end. MNKD added a “going concern” warning of its own to its recently filed 10-K, and at some point soon it seems likely the cash will run out.
MNKD longs point to occasional short squeezes, but the long-term prospects for MannKind are dim. And with the company still valued at $190 million, there’s likely more downside ahead in the near term.
The 7 Worst Stocks to Buy Now: Zynga (ZNGA)
Zynga Inc (NASDAQ:ZNGA) is another retail investor favorite, and another stock where bulls have seemingly endless optimism. But at some point the bull case is going to run out of pillars to support it — and that will be a problem for ZNGA stock.
Zynga, after all, has been in turnaround mode for about five years, since plummeting not long after its late 2011 IPO. Bulls have pointed to the company’s cash balance as making the stock cheap — but that cash balance declined by over $1 billion between 2011 and 2016. ZNGA longs add the value of the company’s San Francisco headquarters to the stock’s valuation, but don’t account for the cost of housing Zynga staff elsewhere.
The company’s acquisition of NaturalMotion and “hit” games CSR2 and Dawn of Titans was the most recent supposed catalyst. But DoT has been a disappointment at least relative to those expectations. Zynga’s portfolio now rests on old, stagnant games like Zynga Poker and Words with Friends, along with knock-off slot games.
All told, Zynga never has returned to the business it had in the early part of the decade, when it was a key part of the Facebook Inc (NASDAQ:FB) ecosystem and FarmVille and Mafia Wars were all the rage. And the company is about out of ways to recapture even part of that glory.
At some point, even ZNGA bulls will move on. That point very well may come in 2017.
The 7 Worst Stocks to Buy Now: Shake Shack (SHAK)
Shake Shack Inc (NYSE:SHAK) already is well below its $90-plus peak from 2015, and has stabilized somewhat over the past few months. So it might look like SHAK stock is cheap enough.
That’s far from the case. SHAK trades at 64 times 2017 consensus EPS estimates. Yet “same-Shack” growth, as Shake Shack terms comparable sales, is guided to just 2%-3% in 2017 … with 1.5-2 points coming from a price increase.
SHAK bulls point to the “whitespace” for the company’s development as it builds out to become a national — and international — chain. And Shake Shack is opening 22-23 restaurants in 2017, after adding 30 locations in 2016. But the company is moving into incrementally smaller markets as it goes forward. And larger chains such as privately held Five Guys and In-N-Out, along with Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB), won’t give up that territory without a fight.
Personally, I’m a fan of Shake Shack burgers. But I’m not a fan of paying 64 times earnings for a chain with meager same-restaurant growth, and a menu that seems out of place for increasingly health-conscious customers.
The 7 Worst Stocks to Buy Now: Callaway Golf (ELY)
The one thing Callaway Golf Co (NYSE:ELY) has going for it is a strong management team. The company has executed a solid turnaround over the past few years, gaining market share in clubs and adding a potentially profitable golf ball business.
The problem is everything else.
Golf participation and golf club demand continue to decline — and taking increasing market share in a declining market is a tough way to grow profits. Bankruptcies — most notably by Sports Authority last year — have led to liquidation sales and will make full-price selling more difficult in 2017. And Callaway has benefited from lower commodity costs, but those costs are rising.
ELY doesn’t strike me as a short, necessarily, if only because it’s a bad idea to short good management. But a share price near $12 looks stretched against EPS guidance of 21-27 cents — even backing out the company’s valuable stake in fast-growing TopGolf. TopGolf is a driving range version of Dave & Buster’s Entertainment, Inc. (NASDAQ:DAVE), and Callaway has said its stake is worth a bit over $2 per ELY share.
Callaway is a decent company. But with weakness in golf unlikely to reverse, and margin compression likely in 2017, ELY is an overpriced stock.
As of this writing, Vince Martin had a short position in VRA.