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All Contents © 2019The Kiplinger Washington Editors
By Will Ashworth
| November 27, 2017
The market's hotter than a pistol right now, leading many to argue stocks are too expensive. If that's true, and I'm not saying it is or isn't, doesn't it at least make sense to take a closer look at your portfolio for money-losing stocks to sell?
Since President Trump's election in November 2016, the Dow Jones Industrial Average is up more than 5,000 points and the S&P 500 is trading at 18.5 times earnings, almost 50% higher than the index's long-term average.
We're in the ninth year of a bull market and while some are suggesting it could carry on for another six to eight years, common sense suggests owning money-losing stocks at this stage of the game is unnecessarily putting your hard-earned money at risk.
I don't believe regular investors should ever own money-losing stocks, especially if they're held within a retirement account, but if you do own any of these seven stocks to sell now, at least reconsider why you own them.
You'll be glad you did.
Prices and data are from the original InvestorPlace story published on Nov. 16. Click on ticker-symbol links in each slide for current prices and more.
It wasn't a pretty picture for Snap (SNAP) stock Nov. 8, after it laid a complete egg with its Q3 2017 earnings.
The social media company lost $443.2 million in the quarter from $207.9 million in revenue. It's hard to understand anyone investing in a business whose revenues look like earnings and earnings look like revenues.
Evan Spiegel and company have it all backwards.
To make matters worse, the company behind Snapchat added just 4.5 million new daily active users in the quarter ended Sept. 30, an increase of just 3% over the second quarter. By contrast, Facebook (FB) increased its DAUs quarter-over-quarter by 3.8% to 3.7 billion.
Facebook did better than SNAP despite having 21 times as many users. That's not a good sign when you're losing $400 million a quarter.
I don't care who you think is buying this company, SNAP's a toxic stock you don't want to own.
At the end of September, CNBCs Jim Cramer weighed in on Wayfair (W), the Boston-based online retailer of home furnishings.
It seems everyone's got an opinion about the hotly contested stock, including short sellers who hold more than 25% of its stock.
"[Wayfair is] spending a fortune to grow in the hopes of taking over the furniture world," Cramer said September 27 on Mad Money. "I wouldn't go short or long this thing. I just think the whole thing is just too dangerous to play in."
If you think it's going to become the Amazon.com (AMZN) of furniture, you've got another thing coming; Ikea's got a much better chance of success than Wayfair.
All the way back in October 2014 when Wayfair went public, I had five reasons to avoid its IPO. One of them was that it was losing money.
"Wayfair had an operating loss of $51 million in the first six months of 2014. Keeping all of the margins the same while inputing a $300 million marketing budget for the year, I expect it to generate an operating loss of $102 million or $1.23 per diluted share," I stated October 14, 2014. "If it continues to spend 23% of every dollar of revenue on sales and marketing, it's going to lose money indefinitely."
I was wrong. Wayfair didn't lose $102 million in 2014; it lost $148 million. It has lost $277 million in the two years since despite more than doubling top-line revenues. In Q3 2017, its operating loss was $74 million, 20% higher than a year earlier on a 40% increase in advertising.
The 20/40 rule isn't going to make Wayfair profitable anytime soon, which makes it a stock to sell now.
Fitbit (FIT) is not looking very healthy at the moment. It coughed up a $113.4 million loss in Q3 2017 on a 22% decline in revenue. Not only that, but its gross margins were 330 basis points lower… not exactly the remedy for a stock that's now below $6 and down more than 30% over the past 52 weeks.
About the only person that believes Fitbit's got a fighting chance of surviving as an independent company is CEO and co-founder James Park who sounded weirdly optimistic in the company's Q3 press release.
"We continue to execute on our transition plan by delivering on our financial guidance and product roadmap, positioning Fitbit on a path back to growth and profitability," said Park. "We believe Fitbit Ionic delivers the best health and fitness experience in the category."
When I last wrote about Fitbit in September, I was remarkably positive about its share price, suggesting that it likely wouldn't drop much farther than where it was trading around $6; that's exactly what has happened even after another money-losing quarter.
My rationale is that someone will come along and buy Fitbit for $9-per-share or three times its enterprise value. I still feel that's going to happen, but unless you can afford for me to be wrong and it doesn't get an offer, time is money that's best spent elsewhere.
I feel like I'm Captain Obvious from the Hotels.com ads, but if you bought IPO shares in Blue Apron Holdings (APRN) and are still holding, you're not very happy about it.
Down almost 70% from its $10 IPO in June, you're probably wondering how you could have missed all the signs?
First, no one is making money in the meal-kit business. German-based Hello Fresh, which has a big presence in the U.S., lost $66 million in the first six months of the fiscal year on $505 million in revenue, while Blue Apron had $84 million in red ink on $483 million in revenue in the same period. And there are many other competitors.
However, the big sign you shouldn't buy Blue Apron shares came June 16 when Amazon announced it was buying Whole Foods. That was a full 13 days before Blue Apron's IPO. You had time to withdraw your commitment.
If there's a company that can sustain losses building a business, it's Amazon. Once they hooked up with Whole Foods, the writing was on the wall.
Blue Apron is a prime example of why you shouldn't buy IPO shares in money-losing companies.
As Bud Fox (Charlie Sheen's character in Wall Street) would say, "It's a dog with fleas."
Of all the stocks I'm recommending investors sell now, Fossil Group (FOSL) just might be the toughest call to make.
It's not because I've got some attachment to the watch and jewelry manufacturer and retailer; rather, it's just so difficult comprehending that Fossil was once valued at $6.6 billion (2013), 23 times its current market cap.
How can you possibly get back to that? You can't, at least not without a miracle or two.
It has been a long time since I've followed Fossil competitor Movado Group (MOV), but I've attached an interesting article from 2015 that compares the two companies.
At the time, Fossil's market cap was four times' Movado's. Today, Movado's is double Fossil's. Oh, how the tables have turned. But it's not necessarily an endorsement of Movado, either. Movado might be a little more upscale and profitable than Fossil, but they're both experiencing shrinking sales that might never come back.
If you must own a watch company, have the good sense to sell Fossil and buy LVMH Moet Hennessy Louis Vuitton SE ADR (LVMUY), which owns several high-end watch brands including TAG Heuer.
LVMUY isn't going anywhere but up.
The Chinese conglomerate Wanda Group acquired AMC Entertainment Holdings (AMC) in August 2012 for $2.6 billion, including debt or 7.5 times EBITDA.
Wanda took AMC public the following December at $18-per-share or almost eight times EBITDA. Today, although it trades at less than $12, its enterprise value is $5.5 billion or almost 15 times EBITDA.
That's a nice trick when you can double your multiple while losing money for shareholders. How can I get in on that action?
In 2016, AMC acquired Carmike Cinemas for $858 million and Odeon Cinemas, a European operator of movie theaters, for $637 million. The two acquisitions plus additional debt for future purchases added $1.8 billion in long-term debt to its balance sheet pushing its enterprise value higher. As of the end of September, AMC had $4.3 billion in long-term debt.
However, it now has over 1,000 theaters, almost three times as many as it had at this time last year. It's definitely growing.
Why sell when its shares are near an all-time low?
Because you can do better with Cineplex Inc (CPXGF), Canada's largest cinema company with 163 theaters generating almost as much in EBITDA from one-tenth the number of theaters.
I can't believe that Pandora Media (P) is still around. Years ago when it was still an experiment, I used to listen to it, but once Spotify and other internet music services came along, I lost interest.
However, one look at its five-year operating history and it's easy to see why. In fiscal 2012, it had operating losses of $11 million on $274 million in revenue. In the trailing 12 months, it had operating losses of $534 million on $1.5 billion in revenue.
No wonder its share price is under $5, well below its all-time high of $40.44 set in early 2014. Unless you're an exceptional company, investors move on.
In June, Sirius XM Holdings (SIRI) bought $480 million in Pandora's Series A preferred stock, which pays 6% annually and gives it the right to convert to common at $10.50-per-share. Pandora can't redeem the shares until September 2020.
With the investment, Sirius XM gained two seats on the board and a 16% ownership stake based on the conversion of those shares.
So, why sell?
It might take three years or more for Sirius XM's investment to deliver more than a reasonable dividend payment for its investors. The $480 million it has put into Pandora is chump change. Whether Pandora lives or dies isn't going to affect SIRI stock.
Sirius XM obviously feels Pandora's worth no more than $10.50 per share or the two parties would have agreed to a buyout.
In the meantime, Pandora continues to lose buckets of money. The opportunity cost is too high. If you like Pandora, sell it, and buy SIRI.
This article is from Will Ashworth of InvestorPlace. As of this writing, Ashworth did not personally hold a position in any of the aforementioned securities.
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