By Lawrence Carrel
With the return of market volatility, your first instinct may be to reach for the Alka-Seltzer. But if all those gyrations are making you queasy, consider this alternative to the fizzy stuff: Sell some stocks. This isn’t to suggest that you should try to time the market, just that the amount of stock you hold should be consistent with your tolerance for risk.
The process of figuring out what to sell is especially tricky if you own individual stocks. That’s because psychological factors are likely to interfere with your decision. (Learn more in our special report about Investor Psychology.) You usually buy a stock because it’s cheap, or it has momentum, or the underlying company offers fantastic products or services (think Apple). You should probably sell if your rationale fails to materialize or the story changes. But you may have trouble unloading a winner because it’s been so good to you, no matter how expensive it has become. And you may have as much trouble letting go of a loser no matter how many problems it faces because doing so would confirm the stupidity of your initial purchase. Tax issues can also affect selling decisions.
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With fear, uncertainty and doubt running high, this is an especially good time to cull the turkeys from your portfolio. Not only is volatility back, but the chances are high that many undeserving stocks have been swept up in the stunning bull market, during which Standard & Poor’s 500-stock index has soared 77.6% from its March 2009 low. Share prices of companies with problems eventually will return to earth.
Below, we identify five fairly well-known stocks that we consider unattractive. None is on the list because of excessive valuation. Instead, we point out companies with fundamental problems that may not yet be reflected in their share prices. If you own any of these stocks, consider selling them. If you’re an aggressive investor, consider betting against them by selling short or buying put options.
Sprint Nextel (symbol S), the nation’s third-largest wireless carrier, is having trouble keeping up with two powerful rivals. In 2009, Verizon Communications (VZ), the market leader, added 4.6 million wireless customers, for a total of 87.5 million, and number two AT&T (T) gained 7.3 million, for a total of 85.1 million. Sprint, meanwhile, saw a net loss of one million customers, for a total of 48.1 million.
Dig deeper and the numbers become even worse. While the Overland Park, Kan., firm gained 2.6 million prepaid customers, it lost 3.5 million of its high-revenue customers -- the ones with long-term contracts who spend more on data plans. For all of 2009, Sprint revenues fell 9%, to $32 billion, and the company lost $2.4 billion, or 84 cents per share. The first quarter of 2010 was no better.
Since peaking at $76 during the height of the technology bubble, the stock has been in a sprint to the bottom. As recently as August 2005, the stock traded at $27, but it has since slipped fairly steadily, bottoming at $3.10 in mid February. The shares climbed 7.5%, to $4.46, on May 13, apparently on news that Sprint had inked a prepaid phone plan exclusive to Wal-Mart (WMT) and had announced the launch date of its first “4G” phone. (All share prices in this article are through May 13.)
Word last month that CenturyLink (CTL) plans to buy Qwest Communications (Q), one of only three remaining Baby Bells, has fueled speculation that Sprint, too, may be a buyout candidate. Betting on an acquisition is a risky investment strategy, however. The market may already be pricing in a merger premium, so with the stock having rallied a bit, this is a good time to hang up on Sprint.
It’s time to tell Harley-Davidson (HOG) to hit the highway. After reaching a record high of $76 in November 2006, shares of the iconic motorcycle maker slid to $7.99 at the March 2009 bottom. Since then, the share price has recovered to as high as $36 in April on growing optimism about the economy, hope for better profits and rumors of a leveraged buyout.
Harley faces strong headwinds. Because motorcycles are basically luxury items -- the typical Harley bike sells for $12,500 -- the Milwaukee-based company says it expects to ship 5% to 10% fewer units this year than it did in 2009, when it posted its first quarterly loss in 16 years. Changing demographics also hurt Harley. As its core customer base of baby-boomers ages and becomes more concerned with safety, it will compete for younger riders, who are less entranced with the Harley brand.
Harley’s financial-services unit continues to be a drag on results. Unable to sell off its customers’ loans amid rising defaults during the credit crisis of 2009, Harley cut its dividend and secured a $1 billion loan to continue financing operations. If credit markets remain tight, the unit could have trouble rolling over the debt, and the company may have to eliminate its dividend of 40 cents a year. The stock closed at $32.91.
In 2004, with the launch of Taxus Express, a drug-releasing coronary-stent system, the stock of Boston Scientific (BSX) peaked at $46. Since then it’s been sliding steadily lower, closing at $6.85.
Over the past year, a stream of bad news has pounded the Natick, Mass., maker of heart devices. Last September, Boston Scientific agreed to pay Johnson & Johnson (JNJ) $716 million to settle 14 patent lawsuits. Over the next few months, the company paid two separate federal fines totaling $318 million stemming from problems with its defibrillators, a 2005 recall at its Guidant subsidiary, and a Guidant kickback scheme. In February, J&J won $1.7 billion to settle long-standing lawsuits over heart-stent patents. On March 15, the company announced that it failed to inform regulators of manufacturing changes, forcing a recall of all its implantable heart defibrillators, which accounted for 15% of its total 2009 revenues of $8.2 billion. The Securities and Exchange Commission and the Justice Department subsequently launched an investigation into the recall. (Boston Scientific got some good news in early May when European regulators approved its Taxus Element stent system and the Food and Drug Administration okayed a new device to prevent heart failure.)
How the recall will impact Boston Scientific’s defibrillator market share remains to be seen. However, the company is losing market share in its other big product, drug-eluting stents, to Abbott Laboratories. Boston Scientific recently forecast that it will lose 88 cents to $1 per share in 2010; only three months earlier, it had predicted a profit of 14 cents to 20 cents a share. Hanging on to this one won’t be good for your stomach -- or your heart.
Meanwhile, grocery chain Supervalu (SVU) failed to live up to its name -- and paid for it. While competitors such as Wal-Mart Stores, Kroger and Safeway aggressively lowered their prices to attract cost-conscious consumers, Supervalu skimped on promotions and sold most products at regular prices. For the three-month period that ended February 27, year-over-year revenues fell for the fourth consecutive quarter, sinking 15%, to $9.2 billion. Same-store sales (sales at stores open for at least a year) dropped 6.8%. The Eden Prairie, Minn., company blamed “a challenging economic environment, heightened competitive activity and deflationary pressures.” Cost cutting helped Supervalu, the parent of the Albertsons, Jewel-Osco and Save-A-Lot grocery chains, reverse a year-ago loss to post a profit of $97 million.
The future doesn’t look bright. The company predicts that sales at existing stores will continue to decline for the fiscal year that ends in February 2011 and that it will earn $1.65 to $1.85 a share, compared with the $1.85 it earned in the February 2010 year.
The stock traded for as much as $49 in June 2007 and for as little as $9 in November 2008. At its current price of $13.83, it looks cheap, selling at just eight times the midpoint of Supervalu’s year-ahead earnings forecast. But, as Hapoalim Securities USA analyst Ajay Jain writes, “Relative to its peer group, (Supervalu's) near-term outlook remains even more troubled.” Time to put this one back on the shelf.
Finally, we take a look at Apollo Group (APOL), the leader in the for-profit education sector. Apollo, which operates the University of Phoenix, weathered the recession better than most. That’s not surprising: When unemployment rises, people go back to school to receive training for new careers or better jobs.
By the same token, when the job market recovers, for-profit schools see fewer applicants and a subsequent decline in revenues. For the quarter that ended February 28, Apollo reported income from continuing operations of $103.2 million, down from $128.8 million a year earlier.
Apollo’s shares have been on the proverbial roller coaster. They peaked at $98 in June 2004, slid into the $30s over the next two years and rebounded to $90 in January 2009. Then they fell again, recovered and were trading in the mid $70s last October, when Apollo announced that the SEC had begun an informal inquiry into its revenue-recognition practices. The current share price: $54.61.
Meanwhile, the federal government is expected to release a proposal with stiff rules that will make colleges accountable for students who graduate with high levels of debt and enter low-paying jobs. Failure to live up to the new rules, expected to be released in June, could put at risk the federal assistance the company’s students receive. With storm clouds on the horizon, it might be time to close the book on Apollo.
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