The debate whether the June tech correction is a sign that the markets have nowhere to go but down for the remainder of 2017 wages on. Market strategist Laszlo Birinyi, head of Birinyi Associates Inc., sees the S&P 500 Index at 2,500 by September. If he’s correct, investors can expect gains of almost 3% over the summer. Not too shabby.
Not everybody, however, is convinced that the S&P 500 is going to keep going up.
“We see a pending top in the market in the next three to six months,” TradingAnalysis.com founder Todd Gordon said June 15 on CNBC.
While Gordon’s not an outright bear, his comments suggest that the good times are coming to an end. Even if Birinyi is correct, is it worth it to be fully invested in the market at a time when returns are getting harder to come by?
Tech stocks got a wake-up call, grocery stores really did, and now I believe these ten stocks could also face some pain in the second half of the year.
10 Worst Stocks: Ferrari (RACE)
Ferrari N.V. (NYSE:RACE) has been a public company for less than two years. In that time its stock’s increased in value by 71.4% from its IPO price of $52 through June 21. Most of the gains coming in 2017, up 53.8% year-to-date.
When Ferrari went public, the excitement was palpable. Investors wanted a piece of the luxury carmaker best known for its Formula 1 team. Who wouldn’t?
“This thing oozes sex appeal,” CNBC’s Bob Pisani said at the time capturing one of the many comments he got from traders. “It’s the Hermes of cars, the Ferragamo.”
So, now that it’s had a strong run in 2017, and trades at 31 times its forward price-earnings ratio, I see its stock getting stuck in neutral. Wealthy people might buy Ferrari’s cars, but I doubt they’re going to want to own it at $100 per share.
10 Worst Stocks: Herbalife (HLF)
Since Herbalife Ltd. (NYSE:HLF) agreed to a $200-million settlement with the FTC last July, HLF stock is up 22.3%, a good, but not great return given the company was seemingly let off the hook by Washington.
Herbalife is Bill Ackman’s biggest short. When the settlement was announced last year, he was very forthright in his thoughts about the direct marketing business.
“While it appears that Herbalife negotiated away the words ‘pyramid scheme’ from the settlement agreement, the FTC’s findings are clear,” Pershing Square Capital Management, Ackman’s investment firm said at the time.
“We expect that once Herbalife’s business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse as top distributors and others take their downlines elsewhere or otherwise quit the business.”
So far that hasn’t happened, but Herbalife’s latest earnings report suggests that the company is already having a tough time succeeding under more stringent FTC regulations put in place as a result of the company’s settlement agreement.
Bill Ackman was wrong about Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and it cost him dearly. I find it hard to believe that he’s going to make a second mistake. Up 49.1% year-to-date through June 21, I think the second half of 2017 is going to deliver bad news for those long HLF stock.
10 Worst Stocks: Wayfair (W)
Up 112.6% year-to-date through June 21 and 160% from its initial public offering, those who bought into W from the beginning have done very well. However, before you continue celebrating, I’d like to revisit two of my five reasons to avoid Wayfair’s IPO. I think you’ll find some issues still exist with the company that isn’t reflected in its share price.
First, I argued back then that Wayfair was losing money. In fiscal 2014 it had an operating loss of $148 million. In 2016, that operating loss increased to $196 million. It continues to spend beyond its means to market its business. As I said then, it’s a losing proposition.
I also had a problem with its valuation, which at the time was 2.3 times sales. Still not making money, its P/S ratio has decreased to 1.8, which is the good news, but now is trading at almost 100 times cash flow. I just don’t see this ending well for Wayfair.
10 Worst Stocks: Apollo Global Management (APO)
There is no doubt private equity as a whole is doing well in 2017. Companies like Apollo Global Management LLC (NYSE:APO) are doing so well, in fact, that they’re driving up the price they’re paying for the companies they buy, leverage and resell for big profits. According to PitchBook, private equity companies are paying just less than 11 times ebitda for acquisitions, the highest price paid since 2008.
Apollo is looking to close its latest buyout fund estimated to be $20 billion or higher.
“Record war chests have buyout funds making a splash globally,” wrote Nikkei Asian Review. “But market players remember how such funds indulged in large-scale deals over the 2005-07 period, only to suffer massive losses during the global financial crisis that followed.”
I’m not saying this is going to happen in 2017, but with Apollo stock up 47% year-to-date through June 21, I’m betting investors are going to take profits in the second half of the year.
10 Worst Stocks: IAC/InterActive (IAC)
A lot is going on at Barry Diller’s media and internet conglomerate. On the upside, IAC/InterActiveCorp (NASDAQ:IAC) is merging its HomeAdvisor business with Angie’s List Inc (NASDAQ:ANGI) to form its own public company that will look to expand its control over consumer home improvement reviews and referrals.
“They’ve been growing revenue and top line for … seven or eight straight quarters, over 35 percent,” IAC CEO Joey Levin said in May at the time of the acquisition. “The business is in a very good place right now. People are excited about getting a piece of HomeAdvisor.”
Stifel Nicolaus analyst George Askew suggested in Barron’s recently that investors wanting to get in on ANGI Homeservices (the newly combined publicly traded company to exist after the merger) are pushing ANGI shares up before this happens, which in turn artificially boosts the price of IAC shares in the process.
So by Askew’s rationale, IAC’s shares aren’t worth the $105 where they’re currently trading.
While Barry Diller’s created great value from IAC over the years, its stock is up 61.5% year-to-date through June 21. IAC is another example of a stock I see cooling off in the second half of the year; not necessarily because it’s a bad stock.
10 Worst Stocks: MSCI (MSCI)
Msci Inc (NYSE:MSCI), the people behind many of the stock indexes that are used by exchange-traded fund providers around the world, is on a bit of run in 2017, up 30% through June 21. Long-time shareholders of MSCI stock have done even better with three-year and five-year total annual returns of 32.8% and 26.7%, respectively.
Like the bull market, now in its ninth year, MSCI shareholders probably don’t see the party ending anytime soon. However, everything has a “past due” date, and I believe the next six months could be the beginning of its regression to the mean.
MSCI has had five healthy years of returns. As a result, its P/S and P/E ratios are higher than they’ve been over the past five years and its earnings yield sits at 2.9%. By comparison, Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) has an earnings yield that’s almost double at 5.4%.
MSCI puts out a lot of interesting data and analytics (I get one of its newsletters) but its phenomenal run, along with the markets as a whole, could be coming to an end in the second half.
10 Worst Stocks: Jeld-Wen (JELD)
If you own a new home or recently installed new windows in your home, it’s possible that you’ve got a product from Jeld-Wen Holding Inc (NYSE:JELD), one of the world’s largest manufacturers of both windows and doors.
JELD hit the NYSE on Jan. 27 of this year gaining 13.6% on its first day of trading and is up 51.7% through June 21 from its $23 IPO price. Some of these gains aren’t unexpected given it priced at the high-end of its $21-$23 range. Studies show that companies that price in this range average first-day returns of 11%, so it was right on target.
IPOs often come unglued after the lock-up period’s passed and pre-IPO investors can exit their investments. In the case of Jeld-Wen, that date is July 26, 2017. Its private equity owner, Onex Corporation (OTCMKTS:ONEXF), reduced its stake from 83.8% before Jeld-Wen’s IPO to 63.4% and again in a secondary offering May 26 to 44.9%.
It still has 49 million shares to unload, however, and some or all of that could happen in the back half of the year which should put downward pressure on JELD stock.
10 Worst Stocks: Vail Resorts (MTN)
Vail Resorts, Inc. (NYSE:MTN) saw the competition for the hearts and dollars of skiers in North America heat up in April when The Aspen Skiing Co. and KSL Capital teamed up to buy Intrawest Resort Holdings Inc (NYSE:SNOW) for $1.5 billion.
Intrawest’s sale brought deep pockets to a ski operator that’s been on shaky ground for the better part of a decade in which it was forced to spin off its crown jewel, Whistler-Blackcomb, to stave off creditors. Vail Resorts ultimately acquired Whistler for $1.4 billion last October.
So, the fight is on. Long-time shareholders might want to think about taking some profits off the table.
MTN stock is up 31.1% year-to-date through June 21; its stock hasn’t had a down year since 2011, and only two in negative territory out of the past 11. With its debt doubled as a result of the Whistler deal and a healthier competitor in the mix, the road ahead is going to get a lot bumpier.
10 Worst Stocks: H & R Block (HRB)
Back around 2010, H&R Block Inc (NYSE:HRB) looked like it was all but dead, put out to pasture by online tax preparation services like Turbo Tax.
However, since HRB stock fell to just below $11 in October 2010, it’s managed to rise to $30, trading as high as $37 in late 2015. Up 36.4% year-to-date through June 21, it’s got to be one of the better comeback stories of the past decade.
A quick look at its fourth-quarter earnings report doesn’t flash any immediate sell signals although revenues were flat at $3.04 billion for the 12-month period ended April 30, 2017. Operating income before taxes rose 10.5% over the last year to $629.3 million. While its operating margin was higher in fiscal 2017, they’ve been higher in previous years.
My biggest concern with H&R Block is that the company’s revenues have sat at $3 billion for the past seven years. The only area that’s growing regarding tax returns prepared is online, up 6.8% in 2017, but that accounts for less than 10% of its overall revenues.
Eventually, investors are going to tire of this Groundhog Day-like business where cost-cutting is the only way to deliver earnings growth.
10 Worst Stocks: Vertex Pharmaceuticals (VRTX)
The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) is up a rather mundane 19.2% year-to-date through June 21. Down 21.4% in 2016, but up seven consecutive years before that, this is an ETF that delivered 15.1% annually over the past decade.
I just had to have one of its top ten holdings on this list. After all, what goes up, must come down.
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is up 83% year-to-date through June 21 on the strength of a three-month push that saw VRTX stock jump 50.7%. As a result of this fantastic year on the markets, it’s managed 27.6% annually over the past three years, four times its pharmaceutical peers.
VRTX shareholders have to be very happy. However, in May, InvestorPlace.com’s James Brumley warned investors that the good news from Vertex’s cystic fibrosis drug was getting far too much traction for just one event. That was May 17. Since then it’s up another 17.9% through June 21.
If it was vulnerable then, very little has changed in the month since to make it less so. I’d be very wary in the second half because even good stocks (Vertex, for sure) have bad things happen to them every now and again.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.