Editor’s Note: This article was updated on March 31, 2021, to correct occupancy numbers for Federal Realty Investment Trust.
Let me start by saying that you should seek out the counsel of professionals to decide on your plan for a comfortable retirement. With that out of the way, it’s fair to say that today’s retirees are likely to dedicate a significantly larger portion of their portfolios to equity investing than prior generations.
That’s because the investing axiom stocks beat bonds; bonds beat cash has literally never been truer. But investing in stocks still carries risk. And the risk I’m writing about today is from stocks that, for lack of a better term, I’ll call impostors.
By that I mean these stocks have some qualities that investors should typically look for as part of a retirement portfolio. But they have some less-attractive qualities as well. In some cases, the company is out of phase with its core market. Some businesses have been critically damaged by the novel coronavirus pandemic.
However despite these flaws, many of these stocks have performed quite well over the last 12 months. And some are being seen as recovery stocks as the economy reopens. In this article, I’ll attempt to explain why each of these stocks appears to be an impostor, particularly for investors who need to maximize the total return of their portfolio (and honestly, who doesn’t).
Let’s take a look at seven stocks that may be best for you to avoid if you’re at or nearing retirement.
- Harley-Davidson (NYSE:HOG)
- Darden Restaurants (NYSE:DRI)
- NOV (NYSE:NOV)
- Xerox Holdings (NYSE:XRX)
- Nielsen Holdings (NYSE:NLSN)
- Federal Realty Investment Trust (NYSE:FRT)
- Simon Property Group (NYSE:SPG)
Stocks To Avoid in Your Retirement Account:: Harley-Davidson (HOG)
As the baby boom generation ages, they may be looking at Harley-Davidson as a nice recovery stock. More Americans are likely to be hitting the open road this year. And, for some, they’ll be doing so on the back of a motorcycle.
That may be true. However the problem for Harley-Davidson is that the baby boomers who may want to invest in the stock are not the ones buying the bikes. The company has an aging customer base and a pricey product.
HOG stock is only down 6% in 2021 and in the last 12 months, the stock price has grown approximately 120%. That puts the share price back to pre-pandemic levels. That’s the good news. The bad news is that the stock was in a five-year downtrend prior to the pandemic.
Harley-Davidson paid (and increased) its quarterly dividend on March 19, 2021. The current yield is only 1.74%. The company slashed its dividend during the pandemic; there’s no shame in that. And the fact that they raised the dividend now shows it cares about its shareholders. But it would be easier to buy HOG stock as a retirement investment if it looked to offer a little growth along with the value. That looks to be just about maxed out.
Darden Restaurants (DRI)
Restaurant stocks would seem to be among the safest of stocks to own as the economy reopens. That may turn out to be true. And it may also be true that Darden Restaurants will not be one of those stocks.
One of the most significant issues that Darden is facing is debt. It has about $1.54 billion in current liabilities (typically due within 12 months) compared to just $777 million in cash. And the company has nearly $6 billion in other debt on the books.
As the economy reopens, it’s fair to say the company should start to improve its cash position but servicing the debt will eat into earnings. That will also mean it’s less likely the company will significantly raise the dividend that it slashed in 2020.
Further complicating things the case for DRI stock as a retirement stock is that it has already had an impressive run. The stock is up 25% for the year and a whopping 146% in the last 12 months. That suggests to me that the stock may already have its vaccine rally priced in.
Rumors of the oil and gas industries demise may yet turn out to be true. But, for now, the sector has received a shot in the arm from rising oil prices. NOV, formerly National Oilwell Varco, makes components and tools that are used in oil and gas drilling and production. As oil producers look to increase efficiency, investors might be looking to NOV stock as a recovery play.
NOV is rated by 19 analysts. And while the stock does have 11 buy ratings, it also has 2 sell opinions (which are very rare) and the company’s current stock price is right about in line with the consensus price target.
The stock is essentially flat for the year, but is up 25% in the last 12 months. However, NOV is down nearly 45% from its pre-pandemic level. And, the stock was in a downspin in the four years leading up to the pandemic. Like many companies, NOV suspended its dividend during the pandemic. And without that, there are simply better choices as a retirement stock in the oil and gas sector.
Xerox Holdings (XRX)
Xerox makes this list for a couple of reasons. But first, let’s give the company credit where credit is due. XRX stock is up 27% in the last 12 months. And the company was enjoying a bit of resurgence in 2019, so the stock is about 31% off its pre-pandemic levels.
The company is also one of the darlings of dividend investors with an attractive yield of over 4%. And xrx STOCK managed to maintain its dividend in 2020, a commendable accomplishment.
Now the bad news. Environmental, social and governance (ESG) issues are becoming a larger consideration for investors. This is particularly true of millennial investors who are having increasing influence on the market. And as my InvestorPlace colleague Josh Enomoto wrote, Xerox falls flat on ESG issues.
Plus, as our Louis Navellier wrote, Xerox is trying to position itself as a play on the artificial intelligence (AI) sector. But while AI can be used in many sectors, it doesn’t mean that every company that offers a form of AI is a worthwhile investment.
Nielsen Holdings (NLSN)
A few weeks ago, Roku (NASDAQ:ROKU) announced a partnership with Nielsen that sent the audience data firm’s stock soaring. Nielsen will be sharing its addressable advertising technology with Roku.
However this deal looks much better for Roku than for Nielsen. The stark reality for Nielsen is that their ratings, while once one of the key metrics for determining ad revenue, are becoming irrelevant in the age of streaming television.
The reason is simple. Streaming services have their own way to track the viewer data that’s important to investors. Add to that a company with significant debt and declining revenue and you have a bleak fundamental picture of NSN stock.
At this time, the stock is above the 12-month consensus price target. Once the sugar high from the Roku deal wears off, NSN stock is likely to move back down, and possibly sharply. And while the company did manage to maintain its dividend in 2020, that was likely because it had cut its dividend sharply in 2019.
Federal Realty Investment Trust (FRT)
The last two stocks on my list of problematic retirement stocks are real estate investment trusts (REITs). REITs have generally held up well as retirement stocks because they are required to return a significant portion of their earnings to shareholders by way of a dividend. However REITs like Federal Realty Investment Trust face some unique challenges as the economy reopens, particularly the REITs that had exposure to brick-and-mortar retail and entertainment businesses.
FRT stock is the first of these two. The company’s properties are concentrated in the Northeast and Mid-Atlantic states with additional properties in Florida and California. If you exclude Florida, you have some of the states that retained some of the strictest mitigation efforts during the pandemic.
The harsh reality is that the company occupancy levels had dropped to 92% from over 94% the year prior. And some of those businesses simply won’t be coming back. That will make it difficult for a company that has seen its stock decline over 35% in the last five years.
FRT stock had a nice rally of nearly 29% through mid-March. But that rally appears to be over and the stock is down 5.5% since then.
Simon Property Group (SPG)
Simon Property Group has taken an innovative approach to weathering the decline of brick-and-mortar retailers. It became the tenant. During 2020, the company — which had acquired Aeropostale in 2016 — added to its portfolio with Forever 21, Lucky Brand, Brooks Brothers, and JCPenney.
Perhaps self-servingly, Simon is upbeat about 2021. The company cites the flight of city dwellers to the suburbs. I’m not so sure I buy that. Last I checked Amazon (NASDAQ:AMZN) still delivers to the ‘burbs. But it’s fair to say that mall traffic will pick up. There has to be some pent-up demand.
There is a bullish narrative for SPG stock. This narrative centers on Authentic Brands, which operates the businesses that Simon has acquired. The thinking is that Authentic will be able to create value in these dormant brands.
Analysts seem less convinced. SPG stock currently has two sell ratings to go along with 10 hold ratings and the stock is currently about 3.5% below the $118 median target price . Furthermore, while Simon’s dividend remains reliable and juicy, at 4.53% yield, its payout has decreased by 17% over the last three years.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.