Of all the standard investing strategies, the contrarian purchase of ill-regarded value stocks is inarguably the sexiest. According to Investopedia, “Contrarian is an investment style that goes against prevailing market trends by buying poorly performing assets and then selling when they perform well.” It’s actually not a style. Rather, contrarianism is something that we all aspire to, but is actually achieved quite infrequently.
Proponents of the strategy take the basic idea of buying low and selling high to the next level. Rather than target companies that are on every analyst’s “must buy” list, contrarians look to the dumpster for battered value stocks. In theory, if you buy an asset that has lost considerable capital, it’s less likely that further losses will incur.
In reality, such reasoning could lead to untold damage.
If the contrarian strategy was so easy to duplicate, everybody would simply buy underperforming value stocks. Why go through the trouble of assessing risks for potential candidates? In such a scenario, one only needs to concentrate on the worst value stocks to gain massive success.
Of course, that’s just not how things work in the real world. Quite often, beaten-up value stocks have a mundane reason why they’re in a predicament. Perhaps management has made poor business decisions that are coming back to haunt them. Or maybe the industry to which they belong is suffering a cataclysmic shift in demand. No matter what the actual cause, jumping on board without careful consideration is a foolhardy but avoidable mistake.
Here are three battered “value stocks” that aren’t bargains — they’re bombs!
Value Stocks That Aren’t Values: Target (TGT)
It’s hard to imagine that a one-year-old controversy could continue to negatively impact an organization. However, that’s exactly the predicament that Target Corporation (NYSE:TGT) finds itself in. Last year, the retail giant’s management team endorsed a restroom policy where access was based on individual gender identity. The backlash from family-based advocacy groups was fierce, leading to a boycott of Target. Worse yet, TGT stock crumbled in the markets.
You probably won’t hear this from other news outlets, but the primary reason why TGT has done so poorly is because they affronted their number one demographic — women. While major retailers have female-dominated consumers, TGT simply attracts more of them. In addition, these are younger, fashion-conscious women who are upwardly mobile. Facilitating a restroom policy that raises the specter of letting predators physically harm them is the worst business decision ever made.
The financials back up this claim. Since the policy announcement, quarterly sales growth (on year-over-year basis) slipped to nearly -6%. This has resulted in inventory sitting by the wayside. The days inventory metric following the controversial announcement jumped over 8%. Directly as a consequence, days inventory for fiscal year 2016 increased by 6.5%. This is the highest margin going back at least ten years.
If TGT wants to get back on the right track, management needs to issue a heartfelt apology to women. Otherwise, expect more pain to come.
Value Stocks That Aren’t Values: Valeant Pharmaceuticals (VRX)
I don’t need to tell you that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is in serious trouble. If you didn’t know, InvestorPlace’s Tyler Craig summed up the sentiment when he stated that VRX stock “smells like death.”
And what exactly does death smell like? Try a 34% year-to-date loss, which follows an 85% fire sale in 2016. Typically, when so much negativity has been incurred, you expect some kind of sympathy rally — the technical term is a “dead-cat bounce.” Call it what you want, VRX stock is in no mood to play.
Mr. Craig lays out the case that VRX could move either bullishly or bearishly in the short term. Hence, he provides two options strategies to advantage either scenario. The problem I have is that technically, VRX stock shows no evidence of building a support base. If one of the ugliest “value stocks” does swing upward, traders would be wise to exit the position quickly. Otherwise, you could end up holding the bag.
Long-term, the contrarian argument is difficult to swallow. As noted by InvestorPlace contributor Will Ashworth, VRX has to cannibalize itself to stay alive. Obviously, that solution has a very limited lifespan. It’s also the reason why a battered stock doesn’t make a great recovery story unless a true catalyst exists.
For VRX stock, I’d look elsewhere. Plenty of options are available that are substantially less risky.
Value Stocks That Aren’t Values: Toshiba (TOSBF)
Among this year’s battered value stocks, the troubles afflicting Toshiba Corp NPV (OTCMKTS:TOSBF) are the most dangerous. American nuclear development firm Westinghouse Electric Co, whose parent company is Toshiba, recently filed for Chapter 11 bankruptcy. That set off national security concerns as Westinghouse is a “leading supplier of reactors for nuclear-powered U.S. aircraft carriers, submarines and other warships,” according to Reuters.
Fortunately, a lot of bad events have to occur before the concerns become a reality. Unfortunately for TOSBF stock, the fallout is just beginning. On a YTD basis, Toshiba is down almost 19%. Some of the pain was mitigated when shares performed a reactionary bounce in mid-March, gaining nearly 19%. But every indicator suggests that this respite is very much a temporary circumstance.
Toshiba has yet to report its fourth-quarter earnings thanks to two delays, obviously stemming from the Westinghouse scandal. Even more alarming for TOSBF shareholders is that the company might not meet its April 11 deadline. They could ask for another extension, but that is a whole lot of ugly. The Tokyo Stock Exchange could very well reconsider Toshiba’s standing on the exchange.
As a member of the troubled value stocks list, this one is really easy to call — just stay away!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.