Warren Buffett famously said, “You only find out who is swimming naked when the tide goes out.” And in an increasingly volatile broad market, weaker stocks to sell have begun to struggle.
Failed growth plays like Snap Inc (NYSE:SNAP), Fitbit Inc (NYSE:FIT) and GoPro Inc (NASDAQ:GPRO) all trade at or near all-time lows. Dividend-paying blue chips Anheuser Busch InBev NV (ADR) (NYSE:BUD), Kraft Heinz Co (NASDAQ:KHC) and Procter & Gamble Co (NYSE:PG) have fallen to multi-year lows amid weak growth and higher Treasury bond yields.
Quality stocks still have the ability to climb in this market — but investors clearly are less forgiving of those companies being left behind.
All told, it’s been much more of a stock-picker’s market so far in 2018. And that requires not just finding stocks to buy for profits, but stocks to avoid that can create losses.
There are a number of stocks that could be the next to fall, particularly if the market as a whole takes another step down. Here are 10 of those stocks to sell that could be dumped next, as savvy stock-pickers gravitate to the market’s best plays.
10 Stocks to Sell: Tesla (TSLA)
While I’ve been cautious toward Tesla Inc (NASDAQ:TSLA) over the past year-plus, I haven’t taken a firm stance toward TSLA stock one way or the other. In fact, I’ve argued that no matter what, investors need to maintain humility in trying to value a stock like TSLA, given the wide range of potential outcomes. Almost a year ago, I detailed a number of reasons why Tesla stock was a terrible short.
But a contentious Q1 conference call only adds to my sense that confidence in Tesla, and CEO Elon Musk, is starting to break. So far this year, TSLA has mostly mirrored the market, with choppy trading leading the stock down about 8% YTD, including a 5%+ fall after earnings.
How long can that really hold up? And what happens if Musk breaks yet another promise and Tesla has to raise more capital in the second half of the year?
I’m not ready to give up on the company’s long-term potential. But TSLA bears are getting louder and louder – and I think more and more investors are going to start listening unless Tesla improves its execution and finally keeps one of its promises. Given its history, that seems an awful lot to ask.
Considering a weakening chart and increasing scrutiny, any stumble from Tesla in the second half is likely to lead TSLA down lower — and perhaps sharply.
10 Stocks to Sell: Brinker International (EAT)
One of the clear, consistent trends in the consumer space over the past few years has been the struggles of large, corporate brands. Among those struggling brands has been Chili’s, owned by Brinker International, Inc. (NYSE:EAT).
Despite those struggles, EAT stock has rebounded nicely of late, climbing over 50% from early November lows. But those gains came off an almost five year low: EAT stock still is down 20%-plus over the past three years.
And I expect the gains to reverse, and reverse quickly. Investors cheered the company’s fiscal Q3 report this week and ignored the fact that full-year guidance was lowered and that traffic continued a multi-year decline. EAT stock might look cheap at 12x earnings but it’s also heavily indebted and struggling with margins. Wages and input costs are rising – but sales aren’t. That’s a toxic combination only exacerbated by a debt-heavy balance sheet.
Meanwhile, an effort to prune the menu and increase portion sizes was supposed to benefit sales – but the declines continue on a same-restaurant basis. At this point, Brinker is basically out of options, like so many similar brands in retail, staples, and restaurants.
All told, the pressures that sent EAT stock to a multi-year low in November haven’t abated. The only thing that has changed is sentiment – but I expect that break at some point over the next couple of quarters.
10 Stocks to Sell: Boston Beer (SAM)
A similar case can be made for Boston Beer Company Inc (NYSE:SAM), maker of Samuel Adams beer. SAM hit its multi-year low in July, and since has rallied 76%.
But its problems haven’t gone away. An exploding number of craft brewers have provided intense competition. Whereas Samuel Adams once stood out from products like Budweiser or Coors Light, it’s now a stodgy, semi-corporate offering itself. Like EAT, short sellers have targeted the stock; a short float of 23% likely has led to a recent squeeze. And like Brinker, Samuel Adams is struggling with growth.
Unlike EAT, however, SAM trades at a huge growth multiple — some 28.5x 2019 EPS estimates. For a company who grew shipments last quarter for the first time in over a year, that’s far too high.
Considering competitive pressures in the beer space, SAM’s growth is going to be muted at best. And when investors remember that fact — and shorts stop covering — SAM stock is going to come back to Earth.
10 Stocks to Sell: New Media (NEWM)
The bear case for New Media Investment Group Inc (NYSE:NEWM) is pretty simple. New Media is buying up newspapers across the country, primarily using debt.
It is the exact same strategy, under the exact same management, that led its predecessor company, GateHouse Media, to go bankrupt in 2013. So far, it has worked. NEWM has gained 24% over the past year, with investors pocketing a handsome dividend as well. (NEWM currently yields almost 9%.)
But it’s not going to last. Recent results from McClatchy Co (NYSEARCA:MNI) and A.H. Belo Corporation (NYSE:AHC) show increasing pressure on print advertising revenue. New Media itself saw revenue fall 4.5% on an organic basis in its first quarter. The dividend is being funded by a series of stock offerings, which reduce shareholders’ ownership and essentially amount to forced sales of the equity. And while New Media has been aggressive in cutting costs, that can’t last forever. The same goes for its strategy of driving growth solely through acquisitions.
Increasingly, the argument that digital revenue can offset print losses for individual papers has been proven to be overly optimistic. New Media’s focus on small- to mid-size markets has given it some protection from that trend – but it will face the same problem. All told, for NEWM, it seems highly likely that the same strategy will, eventually, wind up with the same results.
10 Stocks to Sell: Valeant Pharmaceuticals (VRX)
I’ll admit that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock has held up better than I expected. VRX stock gained 43% last year; it’s dropped 14% so far in 2018, but still sits nicely above November lows.
But I still believe the bill is going to come due for Valeant’s shareholders. The market has pretty much shrugged off a disappointing Q4 report, including 2018 guidance that came in well below expectations. CEO Joe Papa has done a decent job reducing debt and pushing out near-term maturities – but Valeant remains in a world of trouble.
The company closed 2017 with over $25 billion in debt, even after exceeding debt reduction targets through recent asset sales. That debt load is more than 8x the company’s 2018 Adjusted EBITDA guidance of $3.05-$3.20 billion. To put that figure in perspective, Teva Pharmaceutical Industries Ltd (ADR) ADR (NYSE:TEVA) trades at 8x+ EBITDA – including the value of its equity. Mylan NV (NASDAQ:MYL) trades at less than 7x.
Papa has done what he can. But Valeant remains a company with one of the most onerous debt loads in the entire market, relative to its cash flow – and a declining business. Revenue dropped in 2017 even excluding divestitures, and is likely to do the same in 2018. Barring a massive shift in the pharmaceutical business, or a huge turnaround at the company’s Bausch + Lomb unit, VRX stock is going to be “dead money” at best – and a zero at worst. That combination is going to make investors nervous again at some point.
10 Stocks to Sell: Barrick Gold (ABX)
The case for Barrick Gold Corp (USA) (NYSE:ABX) at the moment is based on rising gold prices. Gold has threatened a multi-year high several times this year, though it’s fallen back some of late. A breakout in the yellow metal would seem to be good news for ABX.
But there are two problems with that thesis. The first is that the case for gold doesn’t seem all that strong at the moment. Rising interest rates generally (but not always) are negative for gold prices. The “store of value” argument for bitcoin could peel off some demand as well.
The bigger problem, though, is Barrick’s track record. As I detailed last month, Barrick has been a colossal failure over the past quarter century. The point of owning a gold miner is to gain leverage to upside in gold prices. But ABX – and most of its peers – haven’t delivered in practice what they should offer in theory.
Perhaps this time is different. But with questionable management, continuing political issues, and the disaster that is Pascua-Lama, I wouldn’t bet on it. And if investors get nervous enough to flock to gold, they’ll probably be too nervous to bet on Barrick to capitalize this time around.
10 Stocks to Sell: Alteryx (AYX)
Data analytics provider Alteryx Inc (NYSE:AYX) has more than doubled since its March 2017 IPO. And the gains look like they’re a bit too much – particularly for this market.
Even backing out its cash, AYX trades at roughly 9x revenue. That revenue is growing nicely, with Alteryx guiding for a ~35% increase in 2018. But the company faces competition, notaby from Tableau Software Inc (NYSE:DATA), who is moving into Alteryx’s data preparation space from its legacy visualization base.
SaaS plays like AYX have shown an ability to defy fundamental gravity for a while – even in this market. DATA, Splunk Inc (NASDAQ:SPLK), and Workday Inc (NASDAQ:WDAY) all have risen at least 25% YTD. AYX itself is up 34%.
But Alteryx doesn’t have the same market as those peers – or anything like the same opportunity. And with shorts starting to take aim at the stock, any impact from Tableau could send AYX tumbling. This is a stock that looks priced for something close to perfection – and that’s probably not a good thing.
10 Stocks to Sell: Wayfair (W)
Online furniture retailer Wayfair Inc (NYSE:W) is a classic growth stock. The company has a market capitalization of nearly $7 billion – and remains unprofitable.
So far, investors have remained patient — somewhat. W stock did plunge after Q4 earnings amid profit concerns, albeit from all-time highs. And Wayfair stock posted some gains after Q1 earnings this week.
But I agree with Luke Lango, who wrote in April that W was at risk to drop 50%. Amazon.com, Inc. (NASDAQ:AMZN) and Walmart Inc (NYSE:WMT) both are targeting the home furnishings space. Wayfair has driven strong revenue growth – but it hasn’t proven that it can actually turn a profit shipping heavy (and expensive) furniture to customers’ homes.
The clear risk here is that by the time Wayfair is ready to prove it, competition from bigger rivals — and brick-and-mortar retailers — will undercut that growth. And in the meantime, Wayfair is relying on investor confidence. 48% revenue growth in Q1 is a good start – but Wayfair still has a lot to prove, and potentially not a lot of time to do so.
10 Stocks to Sell: Abercrombie & Fitch (ANF)
We’ve been here before with Abercrombie & Fitch Co. (NYSE:ANF). ANF stock has tripled from 2017 lows. But the stock has made those moves before.
Starting in late 2012, ANF gained 70% in a matter of months. A year later came a 50% run. In 2015, ANF went from under $20 to over $30 in about six months.
Each rally has resulted in disappointment – and lower lows for ANF stock. And I continue to be mystified as to why investors believe this time is different. The mall space remains challenged. ANF trades at 30x forward EPS – more than double the multiple assigned to rival American Eagle Outfitters (NYSE:AEO).
There is some room for optimism. The Hollister brand posted impressive growth in 2017, and namesake Abercrombie & Fitch is starting to turn around. But I continue to think that ANF is overvalued, and with the stock up 51% so far this year and earnings coming in a couple of weeks, investors might be setting themselves to be disappointed yet again.
10 Stocks to Sell: Trupanion (TRUP)
Pet insurance provider Trupanion Inc (NASDAQ:TRUP) already has started to decline, dropping 28% from March highs. But there’s much more downside on the way.
Trupanion does have an intriguing business model, offering pet insurance to customers in an environment where Americans are spending increasing dollars on their pets. (Witness for instance, the $8 billion acquisition of Blue Buffalo Pet Products by General Mills, Inc. (NYSE:GIS).)
But here, too, is an unproven model – and a very questionable valuation. TRUP trades at 16x book value – a huge value for what is still an insurance business, even one growing revenue 23%. There’s a reason short sellers have aggressively targeted TRUP, and investors should realize there’s smart money on that side of the trade.
Trupanion might have a long-term opportunity – but it looks priced in and at best it could be a bumpy ride as TRUP creates value.
As of this writing, Vince Martin has no positions in any securities mentioned.