The recent rebound rally in the Dow Jones Industrial Average couldn’t have come sooner. Before bouncing off its 50-day moving average, the index had declined for eight straight sessions — the Dow’s longest losing streak since 2011.
Still, while the headlines have been bad, the Dow Jones is still only about 2% off its all-time highs. The S&P 500 and Nasdaq Composite are at lofty levels as well. Translation: The market is full of overbought equities. And some would be downright foolish stocks to buy right now.
But what makes a stock a foolish play?
Well, how about one that has been soaring on nothing more than speculation? There are also stocks that have been falling for good reason and still have more losses in store. Toxic stocks, as well as stocks guilty of over-exuberance, make up just a few of the picks on our list.
This isn’t a list of the absolute worst stocks out there — some of these plays have a few redeeming qualities, and after some profit-taking, might actually be “buys” again someday. But if you’re eyeballing any of these stocks right now, or if you hold them, you’ll want to reconsider.
Foolish Stocks to Buy: Snap (SNAP)
Some investors believe that Snap Inc (NYSE:SNAP) is the next great thing in social. Maybe those investors are right. For their sake, I hope they are. But when it comes to putting down the cold-hard cash needed to buy this stock, you won’t find me anywhere nearby.
The team has made a great platform, but the valuation is just too crazy. Trading at 51 times sales is just insane! While revenues are expected to double in 2018, Snap will likely continue bleeding money over the next two years.
Throw in the fact that Facebook Inc (NASDAQ:FB) has been copying many of Snapchat’s best features and the outlook becomes even more dim. One could argue that Facebook’s blatant copying shows Snap’s got the right products. That’s true. But it also shows one of the world’s largest tech companies gunning down on much smaller prey.
While it’s possible that Snap could out-muscle Facebook, I don’t want to be the one betting against Mark Zuckerberg & Co. While Snap’s doubling revenues, Facebook is doing quite well itself, churning out 50%-plus revenue growth in five straight quarters and remains highly profitable. Snap is a recent IPO, meaning it has a small float. It could be squeezed higher as demand outpaces supply. Still, that doesn’t mean it’s a buy for retail investors. It’s got big competition and an even bigger valuation, which screams “avoid!”
Foolish Stocks to Buy: Apple (AAPL)
Some investors may be shocked to see Apple Inc. (NASDAQ:AAPL) on the list. After all, AAPL stock did just break out to new all-time highs. Analysts at JPMorgan slapped a $165 price target on AAPL, while UBS called for $200 within the next three years.
So what the heck do we have Apple on the “Foolish Stocks to Buy” list for? Simple. It’s gone too far, too fast. Shares of this mega-cap stock are already up more than 24% since the start of the year. Apple is a cash-generating machine with plenty of sales and earnings to keep filling its bank account. Investors are looking forward to the release of the iPhone 8 and any potential tax breaks and repatriation holidays.
Despite all the positives though, this stock is overbought. Buying at or near these new highs goes directly against the mantra of “buy low, sell high.” While long-term investors may have more flexibility on their cost basis than a short-term trader, it does not mean they should throw caution to the wind.
Buying Apple on a broader market decline would allow for investors to get a much better entry point. They would also get a higher dividend yield as well. Although it’s an attractive stock and a great company, it can be purchased at a much better price. And for anyone who thinks we don’t like Apple, that’s not true. Here’s proof.
Foolish Stocks to Buy: Kohl’s (KSS)
The retail sector has been a mess this year and Kohl’s Corporation (NYSE:KSS) is no exception. KSS stock is down 20% over the past three months. To some, that may mean a bounce is on the horizon. Without the whole picture though, it’s hard to get a grasp on the company.
After roughly three years of flattish revenue growth, Kohl’s saw sales decline last year. Continuing that trend, analysts expect revenue to fall for the foreseeable future. Net income has fallen for at least four years in a row and analysts expect earnings per share to decline versus last year. For 2017, estimates call for $3.61 in per-share earnings, below last year’s $3.76 mark. Fiscal 2018 forecasts aren’t much better, with analysts looking for just a 2 cent gain to $3.63.
The positives? Over the past four years, Kohl’s dividend has climbed from $1.40 per share to $2. The stock now sports a yield of 5.5%. Additionally, Kohl’s trades at price-earnings ratio of just 12.7. While these are indeed positives, the eroding of its business is too much to overlook. Shares are currently about 15% above its 52-week low of $33.87. However, it wouldn’t surprise me in the least to see shares sink to that level at some point in 2017.
That’s why even though a short-term bounce could be in the cards, the longer-term theme is too hard to overlook.
Foolish Stocks to Buy: Mobileye (MBLY)
For years, Mobileye NV (NYSE:MBLY) has been a hot stock debate. Bulls argue that Mobileye is near the forefront of a technological tidal wave in self-driving cars. Bears argue that the valuation is astronomically high.
Well, Intel Corporation (NASDAQ:INTC) put to rest any question about Mobileye’s valuation when it agreed to acquire it for $15.3 billion. The deal valued Mobileye at about 30 times 2017 sales, a lofty premium by most accounts. So if Mobileye has been purchased, why are we even talking about it? For one, the deal values MBLY stock at $63.54 per share, about 5% higher than its current trading price. There have also been reports that perhaps Mobileye is shopping around for a higher bid.
Undoubtedly, there are investors pondering a purchase of this stock to squeeze out a 4.5% gain and possibly more should another buyer for MBLY materialize. That, though, is a poor strategy. The risk of executing such a strategy is simply not worth the reward. If the Intel purchase fails, shares could tumble right back down to $48. That’s around where the stock was trading before the announcement was made. That decline would represent a 20% loss.
Taking on a potential 20% loss for a 4.5% gain? Simply not worth it.
Foolish Stocks to Buy: Sears (SHLD)
There isn’t much doubt about the rout in retail. While some companies are doing okay, others are getting crushed. Laying amiss in the minefield is Sears Holdings Corp (NASDAQ:SHLD).
Shares are down 24% over the past 12 months and 85% over the past five years. But that hasn’t stopped some investors from feeling that this year’s 23% rally isn’t over yet. They might be right. The rally could go for longer, as short sellers buy to cover their positions. There’s also a belief that CEO Eddie Lampert could save the company. His recent string of insider buying has emboldened longs on their belief.
It’s true that Lampert could take the company private or sell enough assets to save the struggling retailer. While possible, it wouldn’t be prudent to bet on such an event.
The company has relied on selling off its premium assets to stay afloat. This has left SHLD with subpar assets to compete with. Considering the rise of Amazon.com, Inc. (NASDAQ:AMZN) and the fall of retail, it seems Sears has done the exact opposite of what it should have done. Selling its top-performing real estate and the Craftsman brand leaves it with little competitive edge.
“Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern.”
So while Sears could turn it around, technically speaking, it seems pretty darn unlikely. That’s why, your money is best off somewhere else.
Foolish Stocks to Buy: Valeant (VRX)
Like Sears, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has seen a massive fall from grace. But rather than fall 85% in five years like Sears, Valeant’s 87% tumble only took 14 months.
At some point, there has to be value though, right? Maybe, but we’re not going to put our neck in the gauntlet to see the other side. Meaning, we’re not putting our money on the line to find out. While Valeant does have some good businesses under its umbrella, the house of cards continues to crumble. Long-time hedge fund supporter Bill Ackman recently disposed of his holdings. Some may say this will mark the bottom, but is it worth the risk to find out?
The fear here is debt. See, Valeant made a living by acquiring other brands and treatments. It didn’t have a pipeline of drugs. So with the walls crumbling around it, management is left in a tough spot. They could sell the less attractive assets, but it won’t get them much in return. On the flip side, selling their high-quality businesses leaves them with a portfolio of subpar assets — like Sears.
What to do, what to do? Thankfully, as non-shareholders, that’s not our problem. Nor is the company’s $29.85 billion in total debt. This compares to $542 million in cash and a market cap of just $3.9 billion.
So sure, management could wiggle its way out of a tough jam. But if it doesn’t figure out how to do it soon, things are going to keep getting uglier for Valeant.
Foolish Stocks to Buy: Whole Foods Market (WFM)
It seems like Whole Foods Market, Inc. (NASDAQ:WFM) will regain its swagger at some point. But that time hasn’t yet come. In fact, every time it seems like Whole Foods takes one step forward, it ultimately results in two steps back. That’s why despite trading near its range-low around $28, this is still a stock to avoid.
$28 has been support since late-2015. We’re not sure if that support will last and if WFM stock will bounce, or if it will ultimately fail and become resistance in the future. In either regard, we don’t want to find out.
Revenue has continued to chug along, but comparable-store sales results continue to decline. In its latest quarter, comps fell 2.4% year-over-year. For the current quarter, comps are even lower, at -3.2%. In November, it was thought that a dividend hike and sole CEO structure could change WFM’s course. That didn’t work either. Net income has fallen for two straight years and the $507 million earned in fiscal 2016 is below the $551 million earned in fiscal 2013.
While Whole Foods was the go-to in healthy eating in the past, competitors have made up ground. Kroger Co (NYSE:KR) for one has severely upped its natural and organic offerings. Other brands, like Trader Joe’s has poached customers as well.
All of this is coupled with an unattractive valuation. Trading at almost 21 times last year’s earnings, WFM is still expensive. In fact, while its share price is on the decline, its valuation is on the rise. That tells us profitability is in decline. Analysts expect an EPS decline this year and flat growth next year. So it looks like Whole Foods stock could remain under pressure.
Foolish Stocks to Buy: Gilead (GILD)
At some point, Gilead Sciences, Inc. (NASDAQ:GILD) will be a buy, right? You might be calling me crazy, saying a stock that trades at seven times last year’s earnings is one to avoid. But just because it has an attractive valuation, doesn’t mean it’s a stock you should back up the truck for.
For instance, GILD stock has been trading with a sub-7.5x P/E ratio since early 2016. In that time, shares of Gilead have fallen from $90 to $67, a 25% decline. The reason? While sales have come down slightly, its net income has declined notably. Bringing in $13.5 billion last year was good, but not compared to the $18.1 billion earned in 2015.
The $8.2 billion it holds in cash and the 3.1% dividend yield it pays is great. But at some point, this $88 billion company needs to put that money to work and buy some growth! Analysts expect sales to plunge 19% this year and 8% next year, while also forecasting a big drop in earnings. They’re looking for EPS of $11.57 in 2016 to decline to $8.24 in 2017 and $7.53 in 2018.
Obviously that won’t warrant a higher valuation. Using the 7x earnings multiple it has now, Gilead could be trading at $57.68 come this time next year. That’s if the valuation remains about the same and the analysts are correct.
The company needs to do something to grow its top and bottom line and change investor sentiment. Until then, the stock will struggle to move higher.
Foolish Stocks to Buy: Clovis Oncology (CLVS)
For the biotech investors who love a wild ride, Clovis Oncology Inc (NASDAQ:CLVS) has not been a disappointment. From fall 2014 to fall 2015, shares doubled from $50 to $100. Its stay near $100 was short-lived, as the stock fell 75% in one week, before ultimately bottoming out around $12.50 in mid-2016. Since then though, shares have been surging, up some 420% to $65.
So where does that leave investors? On the sidelines, hopefully. The ~$3 billion biotech company may be unfamiliar to many. But when it comes to seeking out hot biotech plays, this one’s pretty high on the list. The stock plunged because two of Clovis’ three drugs came off the board. That left CLVS with one drug, Rubraca, to do the heavy lifting.
Now make no mistake, biotech stocks can be volatile in both directions. This isn’t a list of stocks to sell short. It’s a list of stocks to take a pass on buying. CLVS can continue higher or could be a prime M&A candidate. But trading with a market cap of sub-$3 billion amid forecasts of $220 million in sales for 2018 just isn’t getting it done for me. Forget expectations for it to lose $5.30 per share this year and another $2.60 next year.
Its drugs may be magical stuff, but its valuation is not. Combined with its history of volatility, my wallet (and stomach) will be safer avoiding this one.
Foolish Stocks to Buy: Ford (F)
Like Gilead, it’s almost difficult to include Ford Motor Company (NYSE:F) on the “Foolish Stocks to Buy” list. But just because the stock trades at a low valuation, doesn’t make it buy. We refer to these names as value traps and F stock has all the makings of one.
Trading at just 10 times earnings and yielding more than 5%, this stock has some value investors drooling. I was a shareholder in Ford for years. But when the company put up great results and continuously failed to move higher, I gave up. I’m glad I did too. Shares are down 12% over the past year, 25% over the past three and 5.5% over the past five years. The stock’s P/E ratio is actually up, nearly doubling from mid-2016 levels. But make no mistake, the market isn’t valuing Ford at a higher valuation — it’s earning less money.
Earlier this month, Ford cut its first-quarter guidance to the range of 30 cents to 35 cents per share. Analysts were looking for 47 cents per share. Full-year expectations on the Street call for EPS to decline roughly 10% in 2017. In 2018, analysts expect $1.68 in EPS, up from the $1.59 they expect this year, but still down compared to 2016’s EPS of $1.76.
Revenue expectations call for flat growth this year and sub-1% growth in 2018. No sales growth, plus negative earnings growth in 2017 and 2018 equals no catalyst. We know a higher re-rating of the valuation is all but off the table. Ford could surely bounce and its downside may be limited due to its dividend yield. But that doesn’t mean it’s an attractive stock to buy. Investors who like automakers would be better off in General Motors Company (NYSE:GM).
As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.