Morgan Stanley equity strategist Michael Wilson suggested Oct. 14 that the mini-trade deal with China announced by Donald Trump the previous week is not going to help stocks reverse their course and move higher despite the two-day rally on the news.
“The bottom line is that without a significant roll-back of existing tariffs, we don’t see how a ‘mini-deal’ will change the currently negative trajectory of growth in both the economy and earnings,” Wilson stated.
Furthermore, Wilson sees the December 2018 bloodbath for stocks repeating itself, albeit in a slightly less dramatic fashion due to the fact monetary policy has eased and interest rates are lower.
Last year, U.S. stocks declined more in the month of December than they had since the Great Depression, with the S&P 500 and Dow Jones Industrial Average losing 9% and 8.7%, respectively.
If Wilson is correct, it’s possible that we could see stocks fall by 4-5% in December 2019, putting a bad ending on what has been a very good year.
For those who are worried about what might happen in the final month of the year, here are 10 stocks to sell before December’s meltdown.
Stocks to Sell Before the December Meltdown: Netflix (NFLX)
On Oct. 16, Netflix (NASDAQ:NFLX) reported Q3 2019 earnings that were a mixed bag.
The good news is that the video streamer reported earnings of $1.47 a share, significantly higher than the consensus estimate of $1.05, while its revenues were $5.24 billion, just $10 million lower than analyst expectations and 31% higher than a year earlier.
The bad news is that it added 6.8 million subscribers in the third quarter, 200,000 below the estimate. In the U.S., it delivered just 500,000 subscribers, 300,000 lower than analyst expectations.
Macquarie analysts Tim Nollen and Jordan Boretz did not like what they heard from the company, downgrading its stock from “outperform” to “neutral” on concerns that the streaming competition is about to get really intense — Disney (NYSE:DIS), AT&T (NYSE:T), Comcast (NASDAQ:CMCSA) and Apple (NASDAQ:AAPL) are all introducing video streaming services over the next six months.
“We think it will be hard for Netflix to grow much more in the US, and we suspect pricing power is limited,” the analysts said in a note to investors.
By the end of November, investors will have a good idea of how much damage the competition will inflict on NFLX stock.
TD Ameritrade (AMTD)
By now, most investors are likely aware that TD Ameritrade (NASDAQ:AMTD) announced Oct. 2 that it has eliminated all commissions for the online trade of U.S. stocks, options and exchange-traded funds.
“We expect Fidelity and E*TRADE to react next and announce cuts to their own commission rates over the short-term, with both likely matching SCHW’s/AMTD’s zero rate,” said Credit Suisse research analyst Craig Siegenthaler in a note to clients.
All of these cuts come on the heels of Charles Schwab (NYSE:SCHW) cutting commissions, a move that hit AMTD stock hard, sending it down by 25% on the news. It was the stock’s worst day in 20 years.
With an over reliance on commission revenue, look for TD Ameritrade’s stock to continue to feel the heat.
Mohawk Industries (MHK)
The last few years have not been good for owners of Mohawk Industries (NYSE:MHK) stock. Down 13.9% over the past 52 weeks through Oct. 16, it has got a five-year annualized total return of -0.07%. By comparison, the Morningstar U.S. Market generated almost 12% over the same five years.
Some of the past five years were good to the flooring industry, so the fact that it has performed so poorly suggests that its business needs a revamp. Not to mention its business appears to be getting weaker.
According to Benzinga, Wells Fargo analyst Truman Patterson recently downgraded MHK stock to “underperform” from “market perform,” while keeping the target price at $110.
Patterson suggested in a note to clients that global demand for its products is weakening, a sign that a recession might not be that far off. That’s not good when you consider that its inventories are rising at double the level of its sales, which should lead to lower gross margins over the next few quarters.
Slowing global growth is a big reason that I recommended in September that Mohawk put itself up for sale. If it doesn’t do something over the next few months, you can be sure it will test sub-$100 prices.
Two analysts downgraded Terex (NYSE:TEX) stock recently.
Citigroup analyst Timothy Thein cut its rating from “neutral” to “sell” Oct. 15, while also cutting the target price by $3 to $24, about 10% lower than where it currently trades.
The second research firm to cut the crane manufacturer’s rating is Barclays. Analyst Adam Seiden downgraded Terex from “equal weight” to “underweight” on Oct. 11. Making matters worse, the analyst also cut its target price by $13 to $20, 30% lower than where it currently trades.
Seiden believes that Terex’s business with rental companies is going to slow as the economy moves closer to a recession. In addition, its aerials business should see lower pricing in 2020 as a result of lower demand.
Both of these downgrades suggest that TEX stock will continue to deliver mediocre returns for its shareholders.
It has been four months since CrowdStrike (NASDAQ:CRWD) went public at $34 a share.
The cloud-based cybersecurity firm gained almost 71% on its first day of trading, closing at $58. Rising to as high as $101.88 in August, it has since lost 50% of those gains. Some analysts expect the CRWD stock price to continue to decline over the final two-and-a-half months of the year.
On Oct. 14, Citi analyst Walter Pritchard initiated coverage of the cybersecurity stock with a “sell” rating and a $43 target price, 17% lower than its current share price.
“We see expansion into adjacencies (like EP management and cloud workload) as challenging as they are crowded already.” Pritchard wrote in a note to clients.
A few days prior to Citi giving CRWD a sell rating, Goldman Sachs analyst Heather Bellini downgraded its stock from “neutral” to “sell,” suggesting that growth expectations for Crowdstrike are unrealistic.
They say you can often buy a stock for less than its IPO price within 12-24 months.
While I don’t believe it could trade below $34 by the end of December, the low-to-mid $40’s is definitely a possibility, especially if December turns out like last year.
Domino’s Pizza (DPZ)
Over 12.5 years, DPZ stock delivered a total return of 2,401%, 846 percentage points ahead of Google. It’s an unbelievable stat that shows the power of a strong brand.
And then CEO J. Patrick Doyle stepped down on July 1, 2018, after leading the pizza chain for eight very successful years. Since Doyle stepped down, DPZ stock has lost almost 9% of its value over 18 months that have been good for the markets in general.
The problem for current CEO Richard Allison, who ran the company’s international business, before taking over the top job from Doyle, is that third-party delivery services such as GrubHub (NYSE:GRUB) and Uber Eats provide hungry consumers much greater food options beyond the traditional delivery stables of pizza and Chinese food. In addition, these third-party services offer deep discounts to grab market share, crimping Domino’s same-store sales growth.
Although this discounting is unlikely to last, it’s not likely to stop before 2020, which means DPZ stock could see further deterioration in its share price and become one of the top stocks to sell if we see another market meltdown in December.
Lincoln Electric (LECO)
Over the past two weeks, a number of research firms downgraded Lincoln Electric (NASDAQ:LECO) stock.
On Oct. 9, Stifel Financial downgraded the manufacturer of welding and cutting products, from “buy” to “hold” and gave it a target price of $84, several dollars below its current share price.
A day earlier, Oppenheimer analyst Bryan Blair cut LECO stock’s rating from “outperform” to “perform” as a result of broad-based macro headwinds that will hurt the company’s sales, which are quite cyclical in nature.
Although Blair believes Lincoln has a good long-term future, an uncertain outlook makes it tough to recommend the company despite its healthy balance sheet.
According to the Wall Street Journal, 12 analysts cover LECO with just two giving it a “buy” or ‘overweight” rating, while nine rate hold and one analyst gives it a “sell” rating. The average target price is $91, less than $4 above its current share price.
United Rentals (URI)
United Rentals (NYSE:URI) reported Q3 2019 results Oct. 17 and they were pretty darn good.
On the top line, revenues were $2.49 billion, $40 million higher than the consensus estimate, and 17.6% better than its sales a year ago. Rental revenues were much higher thanks in large part to two acquisitions it made in 2018.
On the bottom line, it also beat the consensus estimate of adjusted earnings of $5.53 a share, coming in $5.96, 26% higher than a year earlier.
However, URI stock dropped as a result of its revised guidance that lowered revenues for 2019 at the high end of its range, from $9.45 billion to $9.35 billion, while also lowering the top end of its range for adjusted EBITDA, from $4.5 billion to $4.4 billion.
Earlier in October, UBS analyst Steven Fisher downgraded URI stock from “buy” to “neutral,” while taking a big chunk out of his target price, dropping it from $166 to $118 on concerns construction is going to slow over the next few months as projects get put on hold or canceled altogether.
Until the economy gets stronger, the rental business could face some serious headwinds.
Align Technology (ALGN)
Guggenheim analyst Glen Santangelo downgraded Align Technology (NASDAQ:ALGN) — the people behind Invisalign, the maker of at-home clear aligners that help straighten your teeth — from “buy” to “neutral” Oct. 7 while also cutting his target price by 20% to $200.
“It is not lost on us that the shares are down meaningfully in the wake of 2Q results, but after doing a deeper dive into the competitive landscape, we underappreciated the rapid evolution of this market,” Santangelo wrote in a note to clients. “We believe it will be challenging for sentiment to improve until there is more evidence available to validate ALGN’s long-term competitive position — and shares will likely be range-bound in the interim.”
Some of its competitors include SmileDirectClub (NASDAQ:SDC), which went public in September, Candid Co., Smilelove and SnapCorrect.
If SmileDirect’s performance is any indication — its stock is down 57% since its Sept. 11 IPO on concerns its practices put customers at risk — the teeth straightening business is about to get a whole lot more difficult.
Tata Motors (TTM)
If you bought Tata Motors (NYSE:TTM) stock five years ago, today you’d have just 21% of your original investment.
Despite the big gain Oct. 17 on news U.K. Prime Minister Boris Johnson had reached a Brexit deal with the E.U., TTM stock remains a major disappointment.
In 2019, it’s down almost 27%. Over the past five years, it has averaged an annualized total return of -26%.
Late in 2018, I thought the spinoff of Jaguar Land Rover made perfect sense because luxury car companies were hot. Now that Brexit might actually happen, it’s unlikely that Tata would want to part with its crown jewel, but it should, because it has made a lot of money for the company since its acquisition 11 years ago.
However, thanks to the deterioration of its business in China, once thought to be its cash cow, a Brexit deal probably isn’t enough to turnaround the luxury automaker.
Is Tata a value play or a value trap?
We’ll know by the end of December.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.