There’s been one relatively consistent rule in the market over the past few years. Winning stocks generally have stayed stocks to buy, while losing stocks have stayed stocks to sell.
That trend is part of a “growth versus value” split in which high-growth, high-priced stocks have significantly outperformed the rest of the market. There have been exceptions, but for the most part investors have been better off buying the best businesses, rather than focusing on the best fundamentals.
It’s possible that reverses. Certainly, value investors have been waiting for that reversal for several years. And with the tech- and growth-heavy Nasdaq composite up 23% year-to-date, and more than 100% since the beginning of 2017, it’s fair to wonder how much further the market’s biggest winners can go.
Still, investors should at least heed that trend. And in looking to buy stocks on the proverbial dip, they should focus only on the best businesses. That’s not terribly difficult at the moment. Despite gains in broad market indices, most stocks are in the red for 2020. Among stocks with a market capitalization over $50 million, 63% have declined YTD.
Investors looking for bargains have their pick — and they should pick well. Among more widely owned names, here are four that they should look past:
Struggling Stocks to Sell: Exxon Mobil
To some extent, the 38% decline in XOM stock so far in 2020 has been driven by external factors. The coronavirus pandemic sent oil prices plunging; front-month oil futures even briefly went negative. Energy stocks moved straight to most investors’ list of stocks to sell.
For oil bulls, however, the decline in Exxon stock would seem to be a buying opportunity. And there’s an intriguing case.
Oil bears are fond of pointing to the rise of Tesla (NASDAQ:TSLA) and other electric vehicle stocks as a long-term negative for crude prices. But post-pandemic de-urbanization could increase fuel demand. The same potentially is true of increased e-commerce activity.
The problem is that it’s not only external factors that have pressured XOM stock. This is a company that seems to be flailing a bit at the moment.
It’s not clear what the long-term strategy is if current energy prices hold. There isn’t enough cash flow, or close, to cover the dividend (which now yields a whopping 8%) and the exploration budget. And the downstream business historically has limited the benefit to XOM stock from higher oil prices.
To be sure, if crude rallies, XOM stock likely does as well. But there are options elsewhere in the sector. Uber-bulls should look to pure-play explorers, with Occidental Petroleum (NYSE:OXY) a high-risk, high-reward play.
Aurora Cannabis got a shot in the arm from surprisingly solid third-quarter results in May. Revenue grew nicely, and the company reiterated its target of reaching positive Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by the end of the year.
But a big rally has faded in the three months since, and it’s not difficult to see why. Aurora’s balance sheet remains stretched. Pricing in the industry continues to be pressured, as evidenced by recent results from rival Cronos (NASDAQ:CRON). Aurora still faces a legitimate risk of restructuring, unless the industry starts driving the growth for which bulls long have hoped.
It’s possible that growth arrives. But if it does, Aurora still seems like one of the cannabis stocks to sell, as there are better options if the external environment improves.
Cronos is sitting on over $1 billion in cash. Canopy Growth (NYSE:CGC) has a broad reach and plenty of dry powder. And there are no shortage of smaller, nimbler, less leveraged alternatives as well. At the very least, the argument that ACB stock now is “too cheap” is belied by the steady, painful decline from early 2019 highs.
YELP stock, too, has taken a hit from the pandemic. But as I detailed a few months back, the problems with Yelp go beyond the pandemic.
Growth simply hasn’t been good enough to support past valuations. Yelp has missed its growth targets, and margins have been pressured by steadily increasing sales and marketing spend.
As a result, YELP stock had missed out on the rally in tech even before the coronavirus arrived. And with a disappointing second-quarter report on sending the stock down 18%, there’s not much reason to believe that will change any time soon.
KO stock admittedly is the safest stock on this list. A long-time income favorite, it’s generally been a defensive play. There are not many better brands in the world than Coca-Cola.
But I’ve long been a skeptic toward KO, and I’m not ready to change my mind. A massive, multi-year transformation plan led Coca-Cola to refranchise much of its bottling operations. Yet (admittedly due in part to a strong dollar), it’s done nothing for earnings, which remained stuck just above $2 per share even before the pandemic.
Meanwhile, diet soda is under pressure. Consumption overall faces potential demand weakness amid obesity concerns. And the pandemic portends a multi-year headwind toward restaurant demand, a key (and high-margin) end market for the company.
This is not to say that KO stock is a short, or that investors need to go rushing to sell the stock. But at 23x forward earnings, and little growth looking forward or backward, the stock seems to be living on its past reputation rather than its current promise.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.