During October, the stock market created many stocks to sell amid a significant decline. At the peak of the plunge in stock prices, all three major indexes fell into correction territory. Despite the volatility, the month ended with two days of triple-digit gains for the Dow Jones Industrial Average.
Although November will begin on a high note, earnings news coming from many key stocks will likely define the market. The midterm elections on November 6th will also loom over the market. Continued Republican control over both houses of Congress would likely lead to few changes.
However, most political analysts predict a Democratic takeover of the House, with fivethirtyeight.com placing the odds at 85.2% as of this writing. Such an occurrence would likely curtail much of President Trump’s agenda and lead to uncertainty as gridlock again takes over Washington.
Whatever happens with earnings or the political makeup of Washington, these equities could become stocks to sell in November:
General Electric Company (GE)
It has become difficult to overstate the reputational damage that GE (NYSE:GE) has sustained in recent years. Analysts will likely argue for years whether the poor management of Jeff Immelt or the ability to come clean during the brief tenure of John Flannery caused more damage to GE stock.
Yet another shoe dropped when GE reported earnings in late October. In the first quarterly report for new CEO Larry Culp, the company cut the quarterly dividend again, this time to one penny per share. The company also missed estimates on earnings and revenue. The firm also announced it would split its power business in two. GE also revealed that the SEC will expand the scope of its investigation on the conglomerate’s accounting practices.
Typically, such revelations might inspire a buying opportunity. However, with GE’s recent history, investors have rightly lost trust that more disclosures will not be forthcoming. Coming clean will further hurt GE stock in the short term. Also, even if Mr. Culp turns GE around, I expect more revelations will come soon. I see such a process as necessary to save GE stock in the long term. However, until the company begins to recover its reputation, investors should keep GE on their stocks to sell list.
Lockheed Martin Corporation (LMT)
As the nation’s largest defense contractor, Lockheed Martin (NYSE:LMT) has seen its stock bolstered by an Administration bent on increasing defense spending. So far, that has worked to LMT’s favor. However, the Democrats who appear likely to take over the House have traditionally looked on defense spending less favorably. With the House controlling the government’s purse strings, that will likely place LMT among the stocks to sell.
LMT stock fell by 17% during the swoon in October, signaling that industry observers have begun to price in a Democratic takeover. This places its P/E ratio at just under 17. That valuation looks reasonable. Admittedly, if the Republicans managed to hold the House, investors should remove LMT stock from their stocks to sell list.
However, this also came after a forecast 155.2% increase in profits for the year. While analysts predict growth will slow to 11.5% per year, they do forecast average annual profit growth of 51.8% per year over the next five years. If Democrats cut defense spending, that forecast could come down, or even turn into a forecast profit reduction.
Despite these sentiments, the world seems to become more dangerous. For this reason, I still like LMT stock long term. However, with a Democratic takeover of the House likely, uncertainty will probably hamper LMT’s growth for the foreseeable future.
Netflix, Inc. (NFLX)
Netflix (NASDAQ:NFLX) stock has long defied the odds and the naysayers, increasing by almost 40 fold in the last six years. Its leadership in the streaming industry and aggressive move into content have made the company one of the most influential companies in both Silicon Valley and Hollywood. As such, investors drove NFLX stock higher despite valuation metrics.
However, the October selloff may have placed NFLX on many stocks to sell lists for some time to come. The stock has fallen by more than 29% since June. It also declined by almost 20% in October alone. Despite this drop, it trades at a P/E ratio of about 113. Analysts forecast average annual profit growth of 61.8% per year for the next five years. With that, it can easily still maintain a P/E well above the S&P 500 average.
Still, one has to wonder if the heyday of NFLX stock has come to an end. Amazon (NASDAQ:AMZN) has improved its content on its Prime service. Worse, Disney (NYSE:DIS) plans to take its content from Netflix and move it to its own service. Such trends bode poorly for the company.
I expect Netflix to retain its influence in Hollywood and continue to grow at a rapid pace. However, with the challenges it faces on the content front, I do not see NFLX stock maintaining a triple-digit valuation.
Square, Inc. (SQ)
During October, Square (NYSE:SQ) became another high-flying tech stock that saw a massive selloff. Since hitting a high of $101.15 per share in late September, SQ found itself as one of the stocks to sell, and it lost about 27% of its value.
Square succeeded in carving out a niche that the mega-cap tech companies could not supplant. With this niche and a growth rate expected to average 54.8% per year over the next five years, investors have bid up the price of SQ stock. Now, it trades at a P/E ratio of almost 165.
While the stock price has recovered some, one has to wonder if SQ stock can hold the momentum it enjoyed in the recent past. Earnings will come out on November 7th. At that point, investors will find out whether the company can push its stock higher, or if valuations will continue to fall.
Square enabled anyone who owns a smartphone to accept credit card payments. In a society becoming increasingly cashless, this has added tremendous value. With its innovations, I think Square will continue its growth levels for years to come. I also believe it will meet or exceed estimates in its upcoming quarterly report. However, at 165 times earnings, the odds of the report inspiring another sustained move higher do not favor the longs.
Starbucks Corporation (SBUX)
Starbucks (NASDAQ:SBUX) achieved something unusual in October — it went up in value. While indexes flirted with bear market territory, SBUX stock saw a steady increase.
The company will announce its quarterly earnings on November 1st. However, I do not see earnings and revenue numbers as the most critical part of the report. With Starbucks having reached a saturation point in its home country, the focus has turned to China. As of now, the company still open a new store an average of once every 15 hours.
Still, the looming trade war remains a dark cloud over all things China. With no signs of a resolution, most stocks with a large presence in China have sold off. Moreover, companies such as Amazon and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) have long found themselves blocked out of a market in favor of a homegrown alternative. If the same thing were to happen to Starbucks, SBUX stock would face severe, long-term damage. China makes up about 3,400 stores of its current store count of over 28,200.
It also accounts for the bulk of the company’s growth. The predicted 14.6% annual profit growth rate over the next five years could disappear in such a scenario. And at a P/E ratio of over 24, the company supports above average multiples. Given its situation in China, I see substantial risk and little reward for buying SBUX stock at these levels.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.