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All Contents © 2017The Kiplinger Washington Editors
By Charles Sizemore
| October 2017
Courtesy Tesla Inc.
It’s been years since we’ve had a proper stock market crash. And while that doesn’t necessarily mean that you should be looking for stocks to sell because a crash is imminent, now’s not a bad time to think about which companies present the biggest risks.
In a bear market, the weakest companies with the flimsiest business models are the ones to get hit the hardest. This is particularly true of corporations that need regular cash infusions from secondary stock offerings.
A falling stock price raises the cost of capital and becomes something of a vicious cycle. Stock declines force greater shareholder dilution as the company issues more shares to bring in a fixed amount of capital. Then the stock heads even lower and, well, you get the point.
Today, we’re going to take a look at seven stocks to sell that I see as particularly at risk to a bear-market mauling. You don’t necessarily have to scramble to dump them immediately, of course; some might even be decent short-term trades.
Just don’t get attached. Once the market eventually rolls over, these seven companies will likely be some of the hardest hit. And you don’t want to be left holding that bag.
Prices and data are from the original InvestorPlace story published on September 25, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
I really hate including Tesla (TSLA) on this list because I admire founder Elon Musk and I really like his product. The world will be a better and greener place for Mr. Musk’s efforts.
But I wouldn’t touch the stock with a 10-foot pole.
Tesla operates in a hypercompetitive industry, and has no enduring competitive advantage in producing electric cars. Virtually every major automaker either already has or is developing a high-end electric car to compete with TSLA stock. Earlier this year, for instance, Volvo announced that in 2019 all of its new cars will be either electric or hybrid. This follows an announcement by Porsche to do the same inside of 10 years. And even mass-market Volkswagen AG (VLKAY) plans to make at least 25% of its cars hybrid or electric.
These are established players that have been around for decades. Tesla is still an upstart that has yet to turn a profit Despite growing its revenues at an impressive clip, Tesla has never come close to earning a profit. And there is no light at the end of the tunnel here; profit projections are murky at best.
Investors will continue to feed Tesla capital...right until they don’t. You don’t want to own Tesla stock when that day comes.
Netflix (NFLX) is another company I really hate to include on this list because I consider management to be visionary, and I love their product.
Netflix has changed the way that all of us watch TV. You can have anything you want anytime you want, on demand. “Binging” a TV show is no longer the sign of social anxiety. It’s just what people do.
Other than for the occasional football game, I don’t really watch live TV anymore. I watch Netflix and a handful of other streaming services.
But while Netflix has revolutionized TV, revolutions have a way of getting out of hand. And Netflix may find its head in the guillotine next.
It ultimately comes down to content. Netflix makes quality original content, but most of what is available is licensed.
The Walt Disney Company (DIS) showed just how vulnerable Netflix is when it recently announced it would be yanking its content to launch its own streaming service. And well-financed competitors like Amazon.com (AMZN) are bidding for the same content with Netflix.
I don’t expect Netflix to have serious financial troubles any time soon. Its service is a bargain, and I don’t see many Americans cancelling it. But when the next bear market strikes, investors might start to wonder if Netflix’s sky-high valuation still makes sense.
Recommending you sell troubled social media platform Snap, Inc. (SNAP) might sound a little like closing the barn door after the horse has already bolted; SNAP stock has had simply horrid performance since its IPO in March. But when the broader market finally turns over, I see a lot worse to come.
Frankly, Snap should have never gone public. The company has yet to figure out its basic business model, let alone a path to profitability. Yes, it is a popular photo and messaging app among Millennials. But this is also a fickle demographic, and there is nothing special or unique about Snapchat that can’t be (or hasn’t already been) copied by better run competitors like Facebook’s (FB) WhatsApp or Instagram.
Meanwhile, Snap remains an unprofitable company trading at a ludicrous 46 times sales. And yes, that's sales, not earnings.
Come the next bear market, I see Snap’s stock disappearing faster than one of its vanishing photos.
Essentially every criticism I leveled at Snap also applies to Twitter (TWTR). Twitter is ostensibly a critical piece of modern news media and journalism. And it’s certainly the preferred medium for President Donald Trump...and for his most vocal detractors.
Yet the company has yet to convert any of its hype into a viable and profitable business model. Twitter has been a public company since 2013, has never posted a profit, and I see no indication that will change any time soon.
You can forgive a fair amount of mistakes so long as a social media company is rapidly growing its user base. After all, the first step is getting users engaged on the platform; monetizing those users can (in theory) come later.
Well, Twitter can’t even do that right. Its monthly active user base failed to grow last quarter, and it actually lost about 2 million American users.
About the only thing Twitter seems to be good at producing is more of its own shares. In just the past year, Twitter has diluted its shareholders by about 5%, due mostly to share-based compensation.
Could new management turn the company around? Maybe. But in its current form and under its current leadership, there’s just not much to like here.
Z22 via Wikimedia
Not to pick on Twitter founder and CEO Jack Dorsey, but I’m also going to recommend you dump another one of his ventures: mobile payments provider Square, Inc. (SQ).
It wasn’t that long ago that Square was the toast of the town. Its mobile credit card reader was a smash hit and effectively turned every iPhone into a point-of-sale terminal. Suddenly, swipe-happy Americans could pay their baby sitters, lawn service and pretty well anything else with their credit cards.
The problem is that the field got really crowded really fast. PayPal (PYPL) entered the fray, as did virtually every large bank. And then if that wasn’t enough competition, newer payment apps like Venmo (owned by PayPal) have further stolen Square’s thunder.
At this point, Square is just one of many sellers of a commoditized product. That’s not an ideal situation to be in.
Square has also never turned a dime of profit… and it has a habit of diluting its shareholders. I don’t see this ending well.
I mentioned The Walt Disney Company (DIS) as a potential thorn in Netflix’s side earlier, but Disney has major problems of its own that have been laid bare in recent quarters. Disney depends heavily on revenues from ESPN, and sports revenues are under full-frontal assault from cord-cutting.
This was a long time coming. The cost of sports programming (along with player salaries and new stadium costs) have been rising at a blistering rate for decades, far in excess of the rate of inflation. And sports programming accounts for a large piece of the typical bundled cable bill (around $20 on average). So, less rabid sports fans, who might be content to watch the occasional Sunday football game, effectively subsidize hardcore fans.
With the average cable bill now over $100 per month, something had to budge. And the revolution that Netflix started made it convenient to cut the cable cord.
Disney has no answer for this. Yes, it can stream its own content, including Star Wars and Marvel superhero movies, and probably make a decent business out of it. But its cash cow – sports programming – likely faces brutal price deflation.
I wouldn’t wait for the next bear market to sell Disney. If you own it, consider cutting it loose.
This list is heavy in tech and media names, so upscale jewelry chain Tiffany & Co. (TIF) might seem like an odd addition. But Tiffany is a risky bet for a number of reasons.
To start, it’s a high-beta stock (beta of 1.8). That means the stock is about 80% more volatile than the broader market, which makes intuitive sense, as high-end jewelry sales tend to be pretty cyclical. You don’t want to own high-beta stocks going into a bear market.
But the story is bigger than that. Wedding jewelry is a big part of total industry sales. And with the Millennials putting off marriage later than any previous generation (due mostly to economic factors), that doesn’t bode well for future sales. Furthermore, Millennials tend to be less traditional and, in some ways, less sentimental about luxury goods.
And if that isn’t enough, you have China to contend with. China makes up a disproportionately large share of global luxury purchases, though anti-corruption measures have partially sated China’s appetite for luxury goods. Demand from China is still relatively strong, but going forward we’re unlikely to see growth rates look anything like they did over the past decade.
So, luxury goods stocks like Tiffany are probably best avoided for the time being.
This article is from Charles Sizemore of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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