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All Contents © 2019The Kiplinger Washington Editors
By Brian Nichols
| December 16, 2016
Don’t make a mistake and believe that what performed well in 2016 also will do well in 2017. Yes, it happens … but it’s a sucker’s bet. In fact, many of a previous year’s best stocks end up being the worst stocks to buy for the coming year.
So much of the current market’s rally is speculative, too. Investors are placing tons of bets based on what policies they think Donald Trump and a Republican Congress will implement in 2017.
But if we’ve learned just one thing over the past couple of decades, it’s that politicians and presidents constantly over-promise and under-deliver.
You’ve been warned.
With that said, I’m looking ahead to 2017 with a particular eye toward 2016’s outperformers. In fact, many of the worst picks for next year are among 2016’s best stocks.
These are seven of the worst stocks to buy for any new money in 2017. And because the party’s nearly over, if you already hold any of these picks, you should consider locking in your profits now.
Mike Mozart via Flickr
After gains of nearly 125% in 2016, about the only thing that Sprint Corp. (S) investors should expect in 2017 is dilution.
Sprint’s valuation has appreciated over the last year due to what seems like improved financials, accelerated subscriber growth and near-term profits. However, Sprint has a massive off-balance-sheet debt haul that parent company Softbank Group Corp (SFTBF) established to keep its balance sheet woes from scaring off investors.
In total, Sprint has about $55 billion in debt. While much of that is off the balance sheet, that debt and interest still must be paid.
Once investors realize the weight of Sprint’s debt in interest payments, and come to the conclusion that any investment Softbank makes in the U.S. will be to diversify its own portfolio, Sprint stock will quickly come down to earth.
Courtesy U.S. Steel
United States Steel Corporation (X) has rallied a whopping 350% this year to be one of the best performing mid-cap stocks in all the market.
Essentially all of its gains are tied to the notion that Donald Trump will spend $1 trillion on infrastructure, much of which on buildings, roads and airports that all require large amounts of steel. Furthermore, many believe that Trump wants to slow imports, boost exports and make business in America the best choice.
If so, that bodes well for X stock. But these are long-term catalysts, coming potentially at the end of Trump’s first term if they ever materialize at all.
In a market that wants instant results, X stock is poised to give back much of what it gained over the past year.
Billy V via Flickr (Modified)
Naturally, if U.S. Steel falls when investors become impatient and catalysts don’t quickly materialize, then the same logic applies to AK Steel Holding Corp. (AKS).
AKS stock — which is about half the size by market cap — has sprinted past X stock this year, up 340% in 2016. That said, I’m more worried about AK Steel than U.S. Steel.
U.S. Steel is a massive company with strong ties to the government. AKS isn’t — and as a result, it could go to extreme lengths to appease shareholders, especially when deals don’t come at the rate that investors expect.
This is a company whose debt-to-asset ratio has soared over the last few years, upward to 50%, proving it’s not the most responsible company. If in fact these catalysts that caused X and AKS to soar don’t materialize early in 2017, expect AK Steel to underperform U.S. Steel.
Mike Mozart via Flickr (Modified)
Wells Fargo & Co. (WFC) has not been a super stock throughout 2016, with gains of just 5%. However, after getting caught up in an account scandal and seeing its stock tumble, WFC has regained all of its losses to rise 20% over the past month.
Ultimately, Wells Fargo is going to give back all of those gains and then some.
Up until this point, WFC has been gaining with the overall market. However, its business losses are comparable to what Chipotle Mexican Grill, Inc. (CMG) saw after its E. coli breakout.
For example, customer interactions with tellers fell 10% during the month of October; consumer account openings fell 44% year-over-year; and debit and credit card applications fell a whopping 50%.
Importantly, these losses accelerate from the month prior, which was also bad.
I conclude that just like Chipotle, Wells Fargo’s account scandal is going to linger for a long time. Therefore, I also conclude that WFC is the next Chipotle.
Had Hillary Clinton won the election, Tesla Motors Inc. (TSLA) would have had all the tax credits it wanted. That includes continued credits for car sales and batteries and future incentives for solar panels and storage systems.
In essence, Clinton had big goals for solar power and renewable energy, and TSLA was a big part of that plan.
However, Trump’s goal is to keep jobs in America and keep big business happy. Trump wants General Motors Company (GM) and Ford Motor Company (F) to thrive, not a Tesla company that produces a fraction of their vehicles.
Besides being overvalued, TSLA has greatly underperformed the market, a trend I expect to continue. Specifically, TSLA could fall 75%!
Amazon.com, Inc. (AMZN) is a wonderful company that is worth every penny of a $400 billion market capitalization. No company has been as disruptive in more industries than Amazon. I believe Amazon Go has the potential to cause for Wal-Mart Stores, Inc. (WMT) and Kroger Co. (KR).
However, Amazon Go is the big catalyst and it will take some time to materialize; easily several years. Therefore, much like other disruptive companies — Apple Inc. (AAPL) and Netflix, Inc. (NFLX) spring to mind — I believe AMZN is poised for a significant pullback before heading much higher.
What concerns me about 2017 is that essentially everyone is bullish on AMZN right now. According to recent research from Goldman Sachs, Amazon is a top 10 holding at 61 hedge funds. Therefore, sentiment has nowhere to go but down.
Once it starts, the domino effect of selling could be quite significant.
Much like Amazon.com, Facebook Inc. (FB) is a favorite among hedge funds, a top 10 holding at 57 funds. In fact, 68.6% of Facebook stock is held by institutions compared to 67.5% for Amazon.
Much like Amazon, overwhelming bullishness and valuation are concerns headed into 2017. Beyond that, there are bigger issues like fake news and inflated metrics to worry about.
Furthermore, Facebook has already said to expect decelerated growth in response to recent controversy.
Facebook has been a simply astonishingly good holding for many years. But collectively, these issues might just be enough to bring FB down to earth in a big way.
This article is from Brian Nichols of InvestorPlace.