The stock market is creeping back toward all-time highs. The S&P 500 itself is just a fraction of a percent away from its high-water mark, and the other big indices are in similar positions.
And yet, danger lurks.
Not from the broader market — while we might not get rip-roaring gains from here as we enter the summer months, most S&P 500 stocks and other blue chips should continue to melt higher as long as we don’t experience a major economic calamity. However, there’s a small group of stocks within the index that poses a real threat to investor portfolios as they underperform this seemingly inexhaustible bull market.
Today, we’re going to look at seven S&P 500 stocks — some with widely known brand names, others that are a bit more obscure, all of which are pretty widely held in investor portfolios — that are on the verge of implosion.
We’re focused on a number of factors when looking for red flags — sentiment, trends, technical performance, and of course, fundamentals. This has generated a list of S&P 500 stocks to avoid (or sell if you hold them) given the likelihood that they’ll see a sizable drop over the next six months.
How sizable? Anywhere between 12% and 25%.
Here’s a look at these S&P 500 time bombs, and how much downside we see in each one.
S&P 500 Stocks That Will Drop: Delta (DAL)
Potential Downside: 17%
In general, airline stocks are trying to take off (pun absolutely intended). But in the case of Delta Air Lines, Inc. (NYSE:DAL), the technicals and overly optimistic sentiment are adding up to a higher likelihood that Delta won’t get off the runway.
Delta shares are off 2% year-to-date amid the airliner’s difficulties competing against budget-minded rivals. Just look at the difference between DAL and Southwest Airlines Co (NYSE:LUV) which is up nearly 20% over the same period!
And yet, Delta’s dismal performance on and off the charts hasn’t put a dent into analyst’ sentiment. Nearly 90% of the 12 analysts covering Delta stock have it ranked a “buy” or “strong buy” equivalent, which means shares also have the looming risk of downgrades to push it even lower.
Intermediate-term trends are shifting into bearish trajectories. Delta looks ready to slide down the “slope of hope” all the way down to $40 per share.
S&P 500 Stocks That Will Drop: Halliburton (HAL)
Potential Downside: 25%
The energy sector gets knocked down, but then gets up again, you’re never gonna … ahem. You get the idea.
Yes, the energy sector is home to a number of comeback stories, but the larger companies that depend more on higher oil prices are lagging the market. Oil services firm Halliburton Company (NYSE:HAL) is off a staggering 13% for the year — much worse than the S&P 500, but more troubling is that it’s underperforming its peer group, which is off 10%.
The economies of scale for Haliburton make the fundamentals harder to change, which is why the company can’t adapt more quickly to the transition in the oil production markets.
The chart above is pretty telling. HAL just bounced off the $43.50 mark — the site of the stock’s 20-month moving average. However, shares are starting to show weakness again, and we believe it will crack that MA, which would put the stock into a technical bear market.
Halliburton is another stock that’s crowded with bulls; 84% of the 22 analysts covering the stock have it ranked a “buy” or better. But that number will go down as the year progresses, which will fuel even more bearishness in the stock.
Our target for HAL over the next six months is $35.
S&P 500 Stocks That Will Drop: Twenty-First Century Fox (FOX)
Potential Downside: 18%
Media companies continue to struggle with the paradigm shift that is going on in the business. Right now, Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA) represents this broader struggle, though it has a number of issues of its own.
Most notably, the company’s news division is in turmoil amid the high-profile departures of Bill O’Reilly and Roger Ailes — who later passed away this month.
FOX shares are now crossing into negative territory for 2017, and is off 5% over the past 12 months. Adding to the pressure is the fact that the stock is crossing into a bear market trend. As May progresses, we are watching Twenty-First Century Fox slip below its 20-month moving average — a sign that the longer-term trends are ready to strike FOX shares even harder.
One last point: 100% of the analysts tracking the stock have it ranked a “buy,” and that’s simply not going to be the case if the stock’s weakness continues. That will trigger a quicker spiral lower to our eventual target of $22 per share.
S&P 500 Stocks That Will Drop: Kraft Heinz (KHC)
Potential Downside: 12%
Consumer staples stocks were the rage for years as market uncertainty and low interest rates helped to fuel outperformance. Those winds have changed, however, as the market has migrated back to technology, financials and industrials while increasingly risk-hungry investors hunt down growth.
Kraft Heinz Co (NASDAQ:KHC) is a staple stock that won’t ever go away — we’re all going to continue putting ketchup and mustard on our burgers and dogs, and we’ll still indulge in the guilty pleasure that is Mac ‘n’ Cheese. But the bears are on the verge of taking control.
KHC is now battling with its 50-day moving average — a trendline that serves as the “canary in the coalmine” for stock watchers. Meanwhile, the stock is headed toward a break of its 10-month trendline, which would be a catalyst for more sellers to enter the market.
The ongoing consolidation at $90 will be the test for Kraft Heinz. However, a failure to hold on this price will have the stock sliding back to the $80 mark.
S&P 500 Stocks That Will Drop: Celgene (CELG)
Potential Downside: 13%
Biotechnology companies continue to struggle as Washington battles over the fate of American healthcare. Pricing is unsure. Regulations are unsure. But the fate of Celgene Corporation (NASDAQ:CELG) seem a little more sure — namely, the stock looks good for a drop of anywhere between 10% to 20% for the remainder of 2017.
Celgene’s latest earnings release failed to impress the market and sent CELG shares into an intermediate-term bearish pattern. The stock is trading well below the key 50-day moving average and is now breaking below the equally critical 200-day.
A cross below $115 will break this technical stronghold and send chart watchers into the market as sellers, increasing the momentum to the downside. From there, CELG will face a test at $111, which is where the 20-month trendline resides. A break below this will move Celgene into a technical bear market.
At this point, 82% of analysts covering CELG stock have it ranked a buy despite the clear weakness in shares, and their relative underperformance versus both the broader market and the biotech industry. That means downgrade risk is high, which adds to the bearish outlook.
Biotech stocks are always a stock picker’s game. For now, avoid picking Celgene, which has probable downside to $100 per share.
S&P 500 Stocks That Will Drop: Leucadia National (LUK)
Potential Downside: 19%
Financial stocks have been a leader in this market, but not Leucadia National Corp. (NYSE:LUK), which is becoming increasingly problematic. (Leucadia National is a private asset company that manages a diversified portfolio of companies, and among them is Jefferies, which is why the stock is considered a “financial.”)
LUK lags the market with a 6% gain year-to-date, though it actually has outperformed the S&P 500 significantly over the past 12 months with a nearly 40% improvement.
The problem is the changing trend and the overly optimistic sentiment toward the stock.
Leucadia’s 50-day moving average has just rolled over as Leucadia shifts from an intermediate-term bull into a targeted bear. This will start to apply additional technical pressure as chart watchers increasingly pick up on the trend and sell into it.
LUK is approaching an important test at $24, which will be a make-or-break point. A move below this level will transition the stock into a corrective phase that will target $20 over the next six months.
S&P 500 Stocks That Will Drop: LKQ Corporation (LKQ)
Potential Downside: 24%
Companies like AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) had been market outperformers as consumers focused on repairing their cars rather than buying. Things changed, though, as low interest rates and better auto values drove the market to new cars.
This shift has affected lesser-known aftermarket parts and companies like LKQ Corporation (NYSE:LKQ) that provide product for that market.
Currently, LKQ trades just above short- and intermediate-term technical support that has been trending lower. This suggests the stock is locked in an “sell the rallies” situation that is not likely to end.
The most recent of these rallies happened after the company’s earnings report, but failed to move the stock above $32, which may have attracted buyers.
LKQ shares are in the process of being rejected by their longer-term 20-month moving average — a move that would maintain a bear market trend. This suggests a target of $24, or a drop of roughly a quarter!
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.