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All Contents © 2020The Kiplinger Washington Editors
By John Waggoner, Contributing Writer
| December 12, 2019
Sometimes, it pays to fold 'em.
While many investors gear up for the new year by scouting out lists of the best stocks to buy, there's virtue in pruning, too. Even though it seems counterintuitive to sell into a rip-snorting bull market, you should parcel out time to evaluate your portfolio for stocks to sell as we enter 2020.
Why? Three reasons:
No one likes selling stocks. You've probably put a lot of work and worry into researching your stocks and holding on to them. But it's an important part of investing, and some of the best investors are not only good buyers of stock, but good sellers. Here then, are five stocks to sell in 2020.
Data is as of Dec. 11. Stocks listed in alphabetical order. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $131.0 billion
Dividend yield: N/A
Netflix (NFLX, $298.93) is long past its days as just a video distributor. It's a producer, too – one that racked up 27 Emmys in 2019, behind only HBO. Orange Is the New Black waved goodbye in 2019, but Netflix still is pumping out hits, including The Crown, Schitt's Creek and Ozark.
And yes, the company still mails DVDs, if you're curious.
All that said, Netflix stock has some problems, first and foremost of which is the rate it's burning through cash. Management is keeping its full-year estimate of a $3.5 billion decline in free cash flow (FCF), which is the amount of money a company has after paying expenses, interest on debt, taxes and long-term investments to grow its business. The company's U.S. subscriber growth is slowing, too, possibly because of hikes in subscription rates. New streaming competition from Disney (DIS) and Apple (AAPL) in an already-crowded field won't help, either.
"We think it will be hard for Netflix to grow much more in the US, and we suspect pricing power is limited," Macquarie analysts Tim Nollen and Jordan Boretz wrote in a note to clients shortly after Netflix released third-quarter earnings in October. "Content costs continue to rise and marketing demands will remain high, and the turn to positive (free cash flow) will take many years, while another debt raise is forthcoming."
Finally, NFLX stock is expensive, selling for an estimated 54 times forward 12-month earnings. The S&P 500, for contrast, trades at just 19 times estimates. And Morningstar puts the company's fair value price at $135 – well below its current price near $300.
If you've recorded big gains on Netflix shares – and you probably have, considering they have appreciated an average of nearly 44% annually over the past decade – you might want to put NFLX among your stocks to sell for 2020, even if it's just part of your position.
Market value: $22.1 billion
Dividend yield: 1.0%
Hundreds of mutual funds and exchange-traded funds (ETFs) – including the iShares Core MSCI EAFE ETF (IEFA), Schwab International Index Fund (SWISX) and Vanguard's sector ETFs – track the indices that MSCI Inc. (MSCI, $260.79) creates.
Giving the dizzying rise of assets in low-cost index funds, it's only logical that MSCI's business should grow, too. So why sell the stock?
One reason: As index funds try to cut their costs, they’re either trying to negotiate lower fees from providers such as MSCI or FTSE Russell, or cutting them out entirely by self-indexing. That could slow MSCI's spectacular earnings growth. For another, MSCI's stock has had an amazing run in 2019, so much so that it now sells at 36 times its forward-looking earnings estimates.
Financial-services stocks typically don't merit such lofty valuations. So if you've enjoyed part of MSCI's fantastic five-year run, in which it has averaged more than 41% annually, it might be time to take profits.
Market value: $2.4 billion
Dividend yield: 1.4%
U.S. Steel's (X, $13.90) share price rose with the imposition of steel tariffs on Canada, Mexico and the European Union in May 2018 – and has since swooned as those tariffs were eliminated for Canada and Mexico a year later.
The company is spending heavily on improvements to its plants – a good thing, but at least in the near term, a drain on cash flows, too. And X shares are extremely overpriced. The stock trades at almost 350 times analysts' expectations for 2019 earnings (just 4 cents per share), and the pros expect the company to absorb a considerable 63-cent-per-share loss next year.
U.S. Steel still has a strong balance sheet, and its stock has rallied sharply in the past two months. Nevertheless, the company still has lost 24% of its value in 2019. You might want to put X shares on your list of stocks to sell for a 2020 tax loss … or for 2019, if you read this early enough.
Market value: $8.0 billion
Dividend yield: 4.7%
Apache (APA, $21.28) – a Houston-based oil-and-gas exploration-and-production company that operates globally – is good at finding oil and getting it out of the ground. It has no control, however, over what price it gets for that oil, which makes for high uncertainty about the company's earnings.
West Texas Intermediate crude oil sells for about $59 a barrel, and Kiplinger's current energy forecast is for $60 to $65 a barrel by March. The U.S. Energy Information Administration (EIA), however, forecasts WTI to average around $55 a barrel. Thus, analysts still are modeling weak Apache earnings for 2020 – an average of between 5 and 14 cents per share, depending on which group of analysts you're talking to. That puts the stock's forward-looking P/E anywhere between 152 and 426.
That makes it tough to make a strong case for APA shares.
Many shareholders likely are sitting on red ink. Apache has averaged 11% losses annually over the past decade, including a 19% decline in 2020. If you own the stock, it makes sense to sell and take the tax loss.
Market value: $8.3 billion
If you're looking to move hard-to-pump materials – anything from peanut butter to spray paint – Graco is your go-to company. It's an expert in what essentially boils down to taking fluid from one place and putting it in another.
There simply aren't many companies like Graco (GGG, $49.91), and that's a mark in its favor. Indeed, the company has been in a long-term uptrend ever since the end of the Great Recession, including 19% average annual returns over the past 10 years.
However, Graco does business all over the world, and while that's normally a good thing, much of the world isn't in the shape that the U.S. is in. Third-quarter sales in the Asia Pacific region have fallen 26% year over year – following 10% and 12% decreases in Q2 and Q1, respectively. That weakness was a huge factor in the company's nearly 4% decline in overall third-quarter revenues, and Graco was forced to lower its full-year 2019 outlook.
GGG shares trade for 27 times next year's estimated profits, which means it will need big growth to outperform the rest of the market. But while analysts do expect Graco to rebound next year, they're not expecting much: a 1.3% nudge in revenues and a 4.4% bump in profits. At worst, Graco ranks among stocks to sell in 2020 as you look for better opportunities. If nothing else, it's best avoided until economic conditions in the Asia Pacific region firm up.