Knowing when to dump a stock is never easy. Companies in a ditch can claw their way out, and highfliers sometimes keep soaring. Yet some stocks are hampered by too many obstacles to make them compelling. The following five stocks face considerable troubles, making them good candidates to sell or trim your holdings. (Prices are as of October 30.)
One beleaguered business is industrial conglomerate Emerson Electric (symbol EMR, $47). CEO David Farr recently warned that the company sees “difficult market conditions” into 2016. Emerson is grappling with weakness in developing nations, waning demand in the energy sector and a strong dollar. Analysts see sales slipping 7.1% in the fiscal year that ends next September. “The business’s strengths don’t outweigh the risks,” says Eric Schoenstein, comanager of the Jensen Quality Growth Fund. (Prices are as of October 30.)
Chipotle Mexican Grill (CMG, $640) still serves up tasty burritos. But the “fast casual” restaurant company faces pressure from higher labor costs and marketing expenses. Sales at stores open at least a year (a key measurement for restaurant chains) inched up just 2.6% in the third quarter of 2015, down from 19.8% growth a year earlier. Even with the stock sliding 16% from last summer’s record high of $758, it’s no bargain at 31 times estimated 2016 earnings. “The business isn’t falling apart, but we don’t see much upside,” says Stacie Cowell, comanager of the Rainier Mid Cap Equity Fund.
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For Stratasys (SSYS, $26), a maker of 3D printers, the challenge these days is stiffer competition. Businesses and consumers are buying 3D printers to churn out everything from dental implants to homemade guns. But rivals have muscled into the business, and demand for the hardware and related services hasn’t climbed as much as expected. UBS analyst Steven Milunovich says that with the stock at 31 times his 2016 profit estimate, Stratasys’s price-earnings ratio is becoming “more realistic.” But “we don’t yet have confidence in the earnings,” adds Milunovich, who rates the stock a “sell” and has a 12-month price target of $18.
After losing more than half its market value over the past year, Spirit Airlines (SAVE, $37) looks cheap. But don’t be fooled. Spirit’s ultralow-fare model is under attack by carriers such as American Airlines, which recently said it was willing to match some Spirit fares, setting the stage for a price war. Low fuel prices are giving other carriers more flexibility to match Spirit’s fares, and Spirit’s CEO rattled investors when he said recently that the company faces a “volatile pricing environment.” Wall Street sees profits dipping 1.2% in 2016. “It seems to be a struggling business,” says Lamar Villere, comanager of the Villere Equity Fund.
It may take guts to bet against Valeant Pharmaceuticals (VRX, $94) now that the stock has tumbled 64% from its August peak. But given the drugmaker’s woes, the stock could fall further. Valeant’s strategy of buying competitors and quickly hiking prices on some of their products seems to have collapsed. What’s more, U.S. prosecutors are investigating the Canadian firm’s pricing and distribution practices. And some investors have raised questions about Valeant’s accounting. Meanwhile, Valeant’s balance sheet is loaded with $30.1 billion in long-term debt. Although Valeant could itself get swallowed up, steering clear seems wise for now.
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