12/22/2011 6:02 PM ET|
5 stocks to avoid in 2012
Sell these widely held stocks before the New Year or you may regret it. Even a perennial winner like Amazon could be in trouble next year.
I am optimistic for what lies ahead in 2012 for the economy and the stock market. While we are indeed in challenging times, a host of great companies are out there doing great things. You just have to know where to find them.
Plenty of low-risk dividend stocks with stable operations and reliable paydays that will do right by investors in the year ahead are still out there.
However, it would be naïve to think it will all be smooth sailing. Lots of stocks are more likely heading for a big fall in 2012, especially as the pressure builds from the eurozone debacle. And as Netflix (NFLX, news) proved earlier in 2011, even Wall Street darlings can crash and burn in spectacular fashion.
Here are five stocks I think are staring at a breakdown in 2012, to sell or even bet against:
1. Cabot Oil & Gas
One lesson investors should learn as they read all the year-end and look-ahead stories is the adage that "past performance does not guarantee future returns." Case in point: A year ago at this time, market darlings included not just Netflix but Crocs (CROX, news) and Green Mountain Coffee Roasters (GMCR, news). Check the performance of those stocks this year, and you'll see that their track records have taken a decided turn for the worse.
Cabot has a nosebleed price/earnings ratio of about 57 based on 2011 numbers, and even if you use the projected $2 earnings per share for fiscal 2012, you're still at a rather pricey P/E ratio of more than 37. Shares have more than doubled in price since mid-2010, while earnings and sales have grown at a modest pace. Other oil-and-gas exploration stocks are also seeing those huge premiums -- Range Resources (RRC, news) has a P/E of almost 42 based on expected earnings, for example -- but you have to wonder if the rush to natural gas stocks is premature.
Critics have raised serious concerns over the environmental impacts of "fracking," a controversial drilling method, after a recent Environmental Protection Agency report linked the practice to water pollution. Regulations could curtail growth for Cabot and others.
2. Chipotle Mexican Grill
I have been leery of Chipotle Mexican Grill (CMG, news) for some time. And while I admit my recent bearish call on Chipotle was a bit premature -- the stock always seems to fight back after a slide -- I see plenty of reasons the stock will be down in 2012.
For starters, Wall Street is littered with the wreckage of hot restaurants that expanded rapidly to deliver big revenue gains and a quick double or triple to shareholders. Krispy Kreme Doughnuts (KKD, news), Cheesecake Factory (CAKE, news), P.F. Chang's China Bistro (PFCB, news) and Ruby Tuesday (RT, news) are just a few of these stories.
Besides, almost every ingredient Chipotle uses is suffering from inflation, squeezing profit margins. And if you've ever been inside a Chipotle, you know that portion control isn't exactly its thing. McDonald's (MCD, news) has burger "manufacturing" down to a science, but Chipotle hasn't figured out portions yet.
Chipotle's growth is indeed impressive. Its five-year growth rate is more than 38%, and the next three years should see annual earnings-per-share growth averaging about 18%, according to Standard & Poor's. But the problem isn't growth, it's expectations. Based on 2012 forecasts of $8.22 in EPS, Chipotle has a ridiculous forward P/E of 39 -- by comparison, the P/E for McDonald's is just 17. Don't think that's a fair comparison? OK, consider fast-growing small-cap Panera Bread (PNRA, news), which has a forward P/E of 24.
Chipotle stock with a P/E of 24 gets you to a little under $200 a share. That's 60% down from here. Ouch.
But a trailing P/E of 96 and a forward P/E of 91? That seems a bit rich, especially when you consider Amazon's net profit is normally about 5% of revenue, thanks to rock-bottom pricing that squeezes competitors and gives Amazon its low-cost appeal. It's great that customers visit Amazon first to compare prices, but there's not a lot of room for error with margins like that -- especially now that Amazon is eating more costs with its Amazon Prime free-shipping deals to preferred customers.
And let's not forget the huge gamble Amazon is making on the Kindle Fire. The company is bleeding cash on the low-cost tablets in an effort to jump into the market dominated by Apple (AAPL, news) and the iPad. Amazon's research, production and subsidies for the tablet will result in a huge step back for fourth-quarter earnings that normally account for about 40% of Amazon's annual profits.
That's fine if the device catches on, but some negative reviews are popping up on tech forums, and Amazon's lack of transparency on Kindle sales figures should make some investors leery. In fact, some analysts say Kindle sales will actually boost iPad sales by familiarizing consumers with the technology and prompting them to eventually upgrade.
And by the way, holiday sales numbers may not be all they're cracked up to be. That doesn't paint a great picture for Amazon in 2012.
4. Office Depot
Office Depot's revenue totaled $15.5 billion in fiscal 2007 and has steadily declined to about $11.5 billion for fiscal 2011. After seven straight quarterly losses in 2008 and 2009, the company managed to break even in 2010 -- but it is forecast to finish fiscal 2011 operating at a loss again. So much for blaming earlier troubles on the recession.
The lack of business spending on office supplies is only part of the story. Rival Staples (SPLS, news) is the No. 2 online retailer in the U.S. by many measures, second only to Amazon and in front of gadget powerhouse Apple. Office Depot just doesn't have the online competitive edge of Staples.
The idea of a big-box office-supply store in general is a tenuous bet these days. It's hard to compete with Wal-Mart Stores (WMT, news) and other discounters on back-to-school supplies and the like, and Office Depot will never have the selection that Internet electronics retailers offer. Sure, the stores also offer business-card printing and other services -- but FedEx (FDX, news) offers the same things at its Kinko's outlets, with a fraction of the square footage and almost as many locations.
What's to like about Office Depot?
Ford Motor (F, news) was in the right place at the right time as General Motors (GM, news) and Chrysler went belly-up. The carmaker gobbled market share, benefitting from government meddling in its competitors. Ford also managed to win both car and truck of the year at the 2010 Detroit Auto Show.
2011 hasn't been as kind. Ford stock is off almost 40%, despite reinstating its dividend to appeal to shareholders and despite the fact that overall vehicle sales are looking to grow by almost 10% this year over 2010.
Why the tumble? Well, irrational exuberance is one reason. Ford peaked at over $18 a share this year, more than double its 2007 stock price, even though revenue was off over 25% from that same period. Returning to profitability was nice, but Ford got there by cuts -- not by growth. What's more, although Ford managed to avoid bankruptcy, thanks to timely debt restructuring just before the financial crisis, its total long-term debt totals more than $100 billion. That's more than Ford's current market capitalization!
One could argue that the worst is over for Ford after a nearly 40% flop so far in 2011. However, it's decelerating in the U.S. and, like most major automakers, is engaged in a massive China gambit. That's all well and good if China keeps booming, but a surprise in Asia could send this automaker reeling.
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Stay away from Best Buy as well. As soon as Circuit City went out of business Best Buy became complacent. They now have the same terrible customer service and unknowledgeable sales people that led Circuit City to bankruptcy.
Best Buy is now headed down the same road to ruin that Circuit City recently traveled. The latest debacle of cancelling orders, just before Christmas that were placed weeks before is now symbolic of the bad customer service and don’t give a damn attitude that Best But now has.
Cabot Oil. Like almost all other finite energy resource stocks it is subject ot market fluctuations in its end product. Inflated gas prices of 2008 saw the petroleum stocks climb as they reaped billions in profits per quarter. The economy cannot sustain that kind of cost. Petroleum is on its way out as an economic foundation. Be leery of all petroleum stocks
Chipotle. Another fad restaurant that has reached it's peak. The boom for this one is over.
Office Depot. Sadly this once fine idea is a thing of the past, because it didn't keep up with the competition. Seriously - a sticky note is a sticky note. Not worth the risk of investment - I see bankruptcy in their future.
Ford. An American institution and one that has been managed well since its inception. It is still owned by the Ford family and run in the family tradition. The down turn in their stock prices was not due to -irrational exuberance- but the deliberate depression of the stock price as the family regained the control of the majority of the outstanding stock. Go follow the insider trading filings with the sec. They avoided a takeover by the same government that bankrupted Chrysler. They are expanding not only into China but also Australia, Africa, and England. To do that takes capital and the best way to test a market is with someone else's money, thus the loans. They have also redeemed all but one of their prime stocks, another reason for the price drop, the holders were afraid they'd loose their investment because they paid more than the call value and might not make the difference in the dividends before the call. I say if you want a steadfast stock, with long term value, a potential sizeable gain, and a good dividend now it the time to buy this one and plan to hold it.
I am still holding Ford. May I tell you why? First of all, the company is well managed and makes a good product. Beyond that, Ford's fundamentals look good. Based on Value Line's figures, Ford is a cheap stock. It's price to sales ratio is about $.31. Anything below $2 per share is a bargain. Its P/E is only 5.5. Return on equity is a measure of whether a company is using its profits wisely. Any figure over 20% is good. Ford's ROE is over 80%.
It's profit margin was only 1.3% in 2009, but is about 6.2% today. Cash flow per share is down from 2010, but still a respectable $3.90 per share. The company has done a remarkable job in cutting its cash to debt ratio to acceptable levels. This company will introduce a dividend and will probably have its credit rating increased early in 2012 (which will reduce it's borrowing costs). BUT....the stock is a 3 to 5 year hold and not for those looking to flip in the short term. Good Luck in your investing!!! It's a jungle out there.
But GM is coming back now, thanks to strong overseas salesGovernment Motors is coming back thanks to screwing the US citizens out of $50 billion at $50 share. Their stock is $21 now after an IPO at $33 so we're about to take it in the shorts for $20-30 billion of that loan. Why not give the GM shares to Ford and they'd own 30% of GM as a reward for not needing a bailout. GM also paid the unions a $5000 bonus to sign a contract when that money should've been used to pay back the US Treasury. GM ought to have a lottery to gove 1,000,000 vehicles costing $30,000 to lucky taxpayers. GM and the auto unions suck.
Office Depot. Yep, i used to buy stuff there. And I learned my lesson. Half their crap didn't work or broke down quickly..........and their warranties were just a lie. Any rebate you were supposed to get, good luck! After jumping through 5,000 hoops they usually came up with some ridiculous technicality to deny you. And the technicality was a mistake or error on THEIR part that left you screwed.
Personal opinion: Don't just avoid the stock. Avoid the stores too.
Avoid FORD, the guy who wrote the article must be a heavy union supporter, GM and Chrysler are a bunch of blood thirsty thieves right along with their Washington buddy's!
Apparently Mr. Reeves specializes in self-fulfilling 'profitcies'.
I suppose that it could be very profitable --- for him.
How does Obama keep getting into the conversation? Regardless, if I had listened to your recommendation re: CMG I would not have been in it at present. I have my profits out ot it and it riding on the house money. I'm not pulling it. I agree with one or two of the comments that if you and the rest of the MSN commentators had the answers you wouldn't be writing about it. You would be doing things that other financially independent people do. Nuff said. Regardless, thanks for your opinion. I do enjoy reading others opinions, Jubac as well.
I agree with the article's conclusions. These are 5 dogs when one considers the many sound companies selling at low P/Es often with juicy dividends.
These bargains are going to gone soon as the market anticipates the inevitable recovery.
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