Investors sometimes complain about quarterly earnings. The argument is that the short-term focus on three-month periods forces publicly traded companies to lose their long-term focus. Decision-making is impaired as companies try to beat Wall Street estimates for each quarter instead of taking the long view. This can turn once-solid companies into stocks to sell over time.
In this market, the “short-termism” argument falls a bit flat. The likes of Netflix (NASDAQ:NFLX) and Amazon.com (NASDAQ:AMZN) have been rewarded by investors for investing in the near term to increase long-term profits.
Still, it’s true that investors can overreact to a single quarter. A modest earnings beat or a few million dollars in extra sale don’t always change the long-term investment case. At the same time, sometimes a quarter matters. Sometimes, performance over three months can change the story for years to come.
For these seven companies, recent earnings reports mattered — and that’s not good news. These aren’t necessarily the seven stocks that fell the most after earnings. But among mid-caps and large-caps, they’re the seven whose stories took the biggest hit and they’re the seven stocks to sell now. Each of these stocks fell sharply during earnings season, and each of these stocks may have a difficult time bouncing back any time soon.
Online postage provider Stamps.com (NASDAQ:STMP) hasn’t just seen its story change after earnings. Its story has broken.
For some time, short sellers had argued that STMP was due for a precipitous fall once its exclusive contract with the United States Postal Service was inevitably altered. They’ve been proven absolutely right. STMP lost its contract in February, news which sent the stock down by more than 50%.
Three months later, in its first quarter report, Stamps.com slashed full-year EPS guidance from $5.15 to $6.15 to $3.35 to $4.85. STMP dropped another 56%, far and away the worst post-earnings decline of any widely held stock. The stock has continued to fall since. It’s now down 86% over the last year, and has lost 78% of its value in 2019 alone. According to data cited by Bloomberg, STMP is the first stock since at least 2001 to fall 50% after earnings following two consecutive quarters.
STMP stock does look cheap, at a little over 10x the low end of 2019 EPS guidance. But with the business model in upheaval, profits plunging, and investor confidence shattered, it should be cheap. And it will likely stay that way for some time until it can right the ship.
3M (NYSE:MMM) is not the kind of company that makes this list very often, if ever. The diversified industrial manufacturer generally has been a stable grower. It’s a Dow Jones component. Economic cycles have their say, but the century-old company has made its way through plenty of booms and busts.
But the company’s Q1 report does put 3M on this list — and near the top. MMM stock fell some 13% after missing estimates and cutting its full-year outlook. The decline was so steep it took nearly 200 points off the Dow Jones Index. The response wasn’t based just on the fundamentals, either.
3M’s CEO admitted that “we’re behind the curve” in responding to lower volumes. An aggressive layoff plan suggests that management — looking forward — might not see demand returning. Meanwhile, weakness was concentrated in two key markets — automotive and China — which may not be on the way back soon. (In the case of automotive, there are long-running worries that demand may have peaked for good.)
On this site, both Will Healy and Josh Enomoto have recommended that investors buy the dip. Both authors make intriguing cases. But MMM has kept falling after the earnings report: it’s now down about 25% from pre-earnings levels. Analysts, including Stephen Tusa, who was dead on in forecasting the long fall of General Electric (NYSE:GE), remain bearish. Trade war impacts could add further pressure. To me, it’s a stock to sell, not buy.
This isn’t a case of investors reacting to a single quarter. They’re reacting to what the quarter means. And what it means is that 3M has fallen behind and has roadblocks in its path toward catching up.
But the Q1 report is more problematic for JWN than the market’s single-day response might suggest. First, JWN shares had steadily drifted downward heading into the report. In fact, save for a very brief dip in 2016, the stock already was at an eight-year low. Expectations were modest heading into the report — and Nordstrom still couldn’t deliver.
The second, broader, issue is that Nordstrom now looks like a business headed for a decline. Mall stocks in general have had a rough go of it lately, but even by those standards, JWN has underperformed. And once the narrative around a stock turns to whether earnings are done for good, it becomes a stock to sell. We’ve seen that with retailers like Bed Bath & Beyond (NASDAQ:BBBY), Tuesday Morning (NASDAQ:TUES) and Pier 1 Imports (NYSE:PIR).
Investors might retort that Nordstrom isn’t part of that group — but that’s the point. The bull case for JWN — and the reason it cleared $65 as recently as early November — was that its brand kept it immune from some of the challenges facing physical retailers. What’s clear at the moment is that investors no longer believe that to be the case. Once that narrative takes hold, in the days of Amazon, it’s very difficult for retailers to convince investors otherwise.
Lowe’s Companies (LOW)
To be clear, all is not lost for Lowe’s Companies (NYSE:LOW), even after a disappointing first quarter report. A 12% post-earnings decline certainly wasn’t welcomed by shareholders. But LOW stock still is positive YTD. Same-store sales still rose 3.5% year-over-year in Q1. The midpoint of fiscal 2019 (ending January 2020) EPS guidance implies adjusted EPS should rise about 9% this year.
But the first quarter report is a big hit to the narrative behind LOW. As James Brumley pointed out in early March, LOW had outperformed Home Depot (NYSE:HD) stock over the past year — a notable reversal from LOW’s historic second-place status. A new CEO, new strategies, and a rationalized footprint seemed set to make Lowe’s a more viable competitor to its larger rival.
Lowe’s did take some share from Home Depot in the quarter: its 3.5% comp outpaced HD’s 3% print. But a huge compression in gross margin suggests that Lowe’s bought some of those extra revenues. And a substantial earnings miss suggests Lowe’s paid too much in the process.
Again, LOW isn’t headed to the list of retailers facing bankruptcy risk. But the rally in LOW stock over the past year-plus was based on the idea that it had room for improvement, and the ability to narrow the gap with Home Depot. Q1 numbers and FY19 guidance both undercut that narrative — which is why Lowe’s stock has fallen so hard.
For Tesla (NASDAQ:TSLA), the earnings report itself wasn’t really the biggest problem of earnings season. Certainly, the headline numbers missed badly, though CEO Elon Musk already had warned that the quarter would be tough. TSLA stock, however, didn’t fall that far after the report, with investors giving the company the benefit of the doubt.
The step-down in US tax credits and the demand spike that accompanied the initial launch of the Model 3 both benefited results in the second half of 2018 — and likely provided headwinds to sales in Q1. Tesla reaffirmed full-year guidance for deliveries, and that seemed to settle investors’ nerves.
It didn’t last, though, for one key reason. Any investor willing to give Tesla a pass for the first quarter had to have some level of trust in the company. Over the last few weeks, that trust has eroded. And what originally looked like a one-quarter problem increasingly looks like a harbinger of permanently lower demand.
Analysts have turned sharply negative. Musk’s claims that a “robotaxi” service would make Tesla cars worth $250,000 each — and make Tesla a $500 billion company — have been dismissed. As Wayne Duggan wrote, investors now are ignoring Elon Musk. In that context, the reaffirmed guidance isn’t evidence that demand will return. Instead, it looks more like yet another broken promise.
TSLA stocks continue to slide, touching another new low on Friday. The narrative here clearly has reversed dramatically since earnings, and I wouldn’t bet on Musk to fix that problem. In fact, I continue to bet that he won’t. Even if you don’t want to make a bearish bet, Tesla is still one of the stocks to sell now.
For Overstock.com (NASDAQ:OSTK), too, the actual earnings report wasn’t the biggest reason OSTK is on this list of stocks to sell. In fact, Overstock’s Q1 actually wasn’t that bad. OSTK stock jumped after revenue beat estimates and the company raised Adjusted EBITDA guidance for its retail business.
The gains didn’t hold: OSTK sits near a three-year low. And like with TSLA, the problem is clear: trust. As I wrote in early March, Overstock.com CEO Patrick Byrne had lost the faith of investors. An investment from GSR Capital, announced back in August, was supposed to be $400 million; per the Q1 conference call, GSR is putting in just $5 million. The retail business was going to be sold, so Overstock could focus on its blockchain businesses. That hasn’t happened. tZERO tokens issued by Overstock’s subsidiary are trading at a fraction of their value.
It was Q4 earnings last year that turned me solidly against the bull case for OSTK. Q1 earnings — while above expectations — don’t change that problem. The retail business still is unprofitable, with little sign for improvement. The blockchain efforts seem to be fizzling out. And on top of it all, Byrne went and sold 500,00 shares of stock at an average price around $13. That sale — near the lows — sent OSTK shares down another 15%. The CEO followed up with a somewhat angry statement to shareholders defending his sale and vowing not “to ever give such an explanation again”.
Without Byrne as a visionary, and without progress in blockchain, Overstock.com is just a struggling and unprofitable online retailer. That’s not enough, even at a multi-year low. This one is solidly on our list of stocks to sell.
Cannabis stocks like Aphria (NYSE:APHA) are going to see quite a bit of volatility, so a bounce back wouldn’t be a surprise. Indeed, APHA shares are up 9% in early trading Friday following an upgrade from Jefferies (NYSE:JEF).
But Aphria’s fiscal Q3 report last month was concerning. APHA shares dropped 12% and kept falling. Before Friday’s bounce, they were trading near 2019 lows — and dramatically underperforming other pot plays like Canopy Growth (NYSE:CGC) and Hexo (NYSEAMERICAN:HEXO).
As I wrote at the time, the declines made some sense. Aphria took a quick writedown of assets in Latin America — assets a short seller report had said were largely worthless. Aphria has disputed that contention, but admitted that key executives hadn’t disclosed conflicts of interest. Growth looked impressive, but came largely from the acquisition of a lower-margin distribution business. The legacy business actually had a disappointing quarter, the key reason why results missed Street estimates.
To be sure, there’s still a bull case for APHA, as I wrote this week. If new management hits new targets, Aphria stock is going to rise. But like so many stocks on the list, the earnings report broke investors’ trust. And in the market, as in life, it’s difficult to get that back.
As of this writing, Vince Martin has a bearish options position in TSLA. He has no positions in any other securities mentioned.