Growth stocks are among the most popular stocks to buy for investors. These high flying stocks typically outperform the market and most benchmark funds. The stocks don’t normally pay dividends, instead opting to use profits to boost the company’s growth through acquisitions and other areas of growth.
With no dividends to reward shareholders, growth stocks are worth holding when the returns are good. The problem is knowing when to sell these high growth stocks in exchange for something else. Signs of a time to sell could be the end of a streak of certain double digit returns, declining revenue growth, declining earnings, a scale back on unit expansion, or lowering guidance.
The following three stocks meet criteria listed above and now fall out of the stocks to buy category. While each could return to its high growth days, the risks here outweigh the reward. Avoid these three stocks and look for other growth stocks to buy instead.
Growth Stocks to Sell: Jack in the Box Inc. (JACK)
In 2016, restaurant stock Jack in the Box Inc. (NASDAQ:JACK) had a memorable run, gaining 49%. Shares shot up as high as $113.30 and traded in the triple digits on the strength of same store sales growth and strong expansion plans.
JACK stock is now trading at $100 and without a deal to split its two restaurant brands, may have further to fall.
In February, Jack in the Box reported mixed results for its two restaurant brands for the first quarter of the current fiscal year. The company’s namesake restaurant brand saw same store sales growth of 3.1%, led by 3.9% growth at franchised locations and 0.6% growth at company-owned locations.
Qdoba stores turned in a disappointing negative 1.0% same store sales, with a loss of 0.5% at franchised locations and a loss of 1.4% at company-owned locations. This compared to the quick service restaurant average of +1.5% for the same time period. In the last full fiscal year, same store sales grew 1.2% at Jack in the Box locations and 1.4% at Qdoba locations. That came after a year that saw respective gains of 6.5% and 9.3%.
While the results from the JACK stores came in ahead of the segment average, it is worth noting that the company same store sales gain of 0.6% came mainly from increased average checks that were up 4.9%. The stores saw a big customer loss. Add that in with the alarming figures from Qdoba and this high-growth restaurant chain could be in trouble.
Guidance from Jack in the Box looks rough as well. The company sees same store sales down 2.0% to flat for Jack in the Box restaurants and down 1.0% to 3.0% for Qdoba restaurants in the current quarter. That compares to flat gains and an increase of 3.1%, respectively, last year.
Things get even worse when reading through guidance given for the full fiscal year. JACK expects same store sales to gain 2.0% at its namesake stores. At Qdoba locations, the company expects flat same store sales. Expansion plans call for the opening of 20 to 25 Jack in the Box locations and 50 to 60 Qdoba locations.
During its fourth quarter earnings presentation, JACK forecasted same store sales growth of 2.0% to 4.0% for Jack in the Box locations and same store sales of flat to +1.0% for Qdoba locations. The company has now forecasted the low end of both ranges. An original forecast of opening 60 to 70 Qdoba locations has also been scaled back to the low end.
JACK has nearly 3,000 restaurants across the country. There are around 2,200 Jack in the Box stores in 21 states and 700 Qdoba stores in 47 states. After shifting away from its company-owned model and franchising more stores, the company actually has a higher percentage of company-owned stores this year than last.
One of the more troubling stat for this former growth stock is its earnings-per-share forecast. The company guided for EPS in a range of $4.25 to $4.45 for the current fiscal year. That range would represent gains of 10% to 15%, which isn’t horrible for a restaurant company. It would, however, end a five-year streak of earnings gaining at least 20%.
With same store sales declining and the high earnings growth coming to an end, it may be time to exit this restaurant stock. JACK stock appears to be set to coast and not return the high returns of the past several years. The remaining catalyst of spinning off Qdoba appears to be a longshot and not reason enough for me to be excited about this former growth stock.
Growth Stocks to Sell: Michael Kors Holdings Ltd (KORS)
Michael Kors Holdings Ltd (NYSE:KORS) was once a high-growth luxury brand. KORS stock was also one of the best-performing stocks in its early days as a public stock.
After a successful IPO in 2011, Michael Kors stock went from $25 in its first day of trading to $101 in less than three years. KORS stock is still up more than 50% from its IPO, but it has come back down to earth to a more reasonable $37. However, declining sales and lowered guidance make this growth stock a risky bet.
In February, KORS reported third-quarter earnings and updated its outlook for the fiscal year. Revenue for the third quarter declined 3.2% to $1.35 billion. Adjusted for currency, the loss was only 2.6%. Retail net sales were up 9.2%, but that came from an acquisition of prior licensed stores in China and South Korea. The more telling retail numbers were same store sales down 6.4% and wholesale sales down 17.8%.
This follows a trend of declining revenue for KORS throughout the current fiscal year. Revenue for the first nine months is down 2.3% adjusted for inflation. Same store sales have fallen 6.6% as less consumers are visiting their stores and making purchases there.
This is disappointing for KORS shareholders as it comes after a strong fiscal year that saw revenue hit $4.7 billion. That mark was a gain of 7.8% or 11.7% when adjusted for currency. The acquisition of additional licensed stores was also seen as a positive sign for the luxury brand.
However, as mentioned above, when guidance comes in weak or gets lowered, it looks like a sign to sell. In June, KORS said it expected full fiscal year 2017 revenue to be flat and same store sales to be down low-single digits. EPS were also seen hitting a range of $4.56 to $4.64. During the third-quarter earnings presentation, all of those figures were scaled back. The company now sees full year revenue hitting $4.48 billion, same store sales declining in the high-single digit range and EPS falling into a range of $4.15 to $4.19.
Until KORS can show signs of a turnaround or a meaningful catalyst, investors would do better elsewhere.
Growth Stocks to Sell: Hologic, Inc. (HOLX)
Hologic, Inc. (NASDAQ:HOLX) is a dominant player in the women’s health market. The company has used a series of acquisitions and organic growth to turn itself into an $11 billion company in terms of market capitalization.
HOLX shareholders have been rewarded with gains of 33% in the last two years and 96% over the last five years. A quick look at the company reveals its high growth phase could be over and the company is no longer a growth stock.
During a February investor presentation, Hologic used phrases like “stabilized declining businesses” and “from turnaround to sustainable growth”. While strong growth in areas like breast health (+39%) and diagnostics (+44%) were highlighted, the high growth days appeared to be behind the company.
Back in fiscal 2015, HOLX posted quarterly revenue gains of 7%, 2%, 10% and 10%. That was followed in 2016 by quarterly gains of 7%, 6%, 3% and 3%. The first quarter of fiscal 2017 saw a gain of 6%. Double digit gains last came in the fourth quarter of 2015. Since that time, a gain of 7% has been the highest the company has seen.
The first quarter saw revenue increase 5.6%, led by surgical (+16.2%). The other segments saw mediocre results, with diagnostics and breast health up 4.7% and 4.2% respectively. The skeletal segment declined 10.8% and was the weakest performer.
Fiscal 2016 saw revenue increase 4.7% to $2.83 billion. HOLX actually believes that its 2017 revenue will fall below that level with new guidance suggesting a range of $2.785 to $2.825 billion. The company also sees EPS declining by 1.5 to 3.1%.
Hologic has strong brands and dominant positions. This includes the mammogram segment, where it has more than 24,000 units in its focus markets. While the company will continue to see strong demand for its products, it can’t seem to shake off declines in several areas. Without a meaningful catalyst or acquisition, HOLX looks like it is no longer a growth stock and it should be avoided.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.