3 Cinderella stocks to sell before midnight strikes
These big 2013 winners delivered a profit windfall, but are due for a 2014 disappointment.
By Jeff Reeves
Everybody loves a good Cinderella story, where a shabby housemaid gets to be the belle of the ball.
But don’t forget that one of the most important parts of a Cinderella story is the graceful, well-timed exit. After all, nobody wants to be seen stumbling around in rags while their high-class wheels turn back into a pumpkin.
Keep this in mind if you're sitting on some of these Cinderella stocks of 2013 that delivered a king’s ransom in profits. . . but really are just peasants dressed up in fancy clothes. If you get greedy and hang on to these picks too long, things may not end so happily ever after.
Here are three high-flying Cinderella stocks to sell before midnight strikes and they crash and burn:
Year-to-Date Gain: 134%
Airline stocks are tough investments. The industry is characterized by regular bankruptcies, expensive pension costs, costly regulation and volatile fuel costs.
But one airline’s pain always seems to be another’s opportunity. And as American Airlines (AAMRQ) grappled with bankruptcy in the last year, Delta has been in the middle of a big turnaround.
Delta emerged from Chapter 11 itself in 2007, and that troubled period was quickly followed by the Great Recession. DAL stock languished, simply trying to hold things together. . . but now it has gotten its groove back and is back above where DAL started trading post-bankruptcy in 2007.
That’s thanks to a restructuring of its pension plan, cost cutting and modest revenue growth. According to Standard & Poor's, fiscal 2013 could see four times the profits it saw in 2010 should projections hold, and more than double the earnings of last year!
Heck, Delta even announced an ambitious dividend and buyback scheme worth more than $1 billion -- something unheard of in an industry characterized by regular bankruptcies and debt restructurings. What’s not to like?
A lot, actually. Because investors should remember that all these improvements from the bottom cannot be replicated going forward. Delta posted a quarterly loss as recently as 2012, and a lot of the gains this year were part of the snap-back from the bottom.
There just isn’t a lot of organic growth in airlines. . . and even if there is a cyclical recovery, a lot of optimism is now priced into DAL stock. The pressures of competition and higher fuel costs could really eat into margins next year, where the company is predicted a modest 10% earnings growth and less than 4% revenue growth.
That dividend yields less than 1% -- so income is hardly a reason to hang on to DAL stock. Sell now before this high-flier comes in a for a rough landing in the new year.
Sector: Specialty retail
Year-to-Date Gain: 252%
Best Buy (BBY) didn’t stand out to anyone as a company with a bright future at this time last year. The embattled big-box store has its hands full amid e-commerce competition and “showrooming,” and many left it for dead.
That pessimism was clearly overdone, however, as Best Buy has learned how to adapt and survive in this environment.
Although sales have actually declined for six consecutive quarters, Best Buy has managed to stage a pretty substantial turnaround by slashing costs. In fact, BBY stock will close this fiscal year with its first annual profit since 2011, and is forecast to then grow earnings a modest 9% again next year.
But investors shouldn’t confuse efficiency with growth, and if Best Buy was oversold a year ago, it could very well be overbought now. It’s undeniable that part of the pop in share price is thanks to founder Richard Schulze making noise about taking the company private, and a short squeeze that allowed the stock to double in a few months to start the year … but what will lift BBY stock in 2014?
Sector: Grocery stores
Year-to-Date Gain: 82%
Grocery stores are hardly an exciting business. The grocery game is notoriously low-margin thanks to frugal shoppers and high competition, the nature of a national distribution network for perishable foods can be maddening, and most grocery chains are regionally landlocked with little room for growth.
So what gives with Safeway (SWY) and its rip-roaring run?
Well, to start the year, roughly one-third of outstanding SWY stock was held by short sellers -- that is, investors betting against the company. But rumblings about a potential buyout either for all or part of the company sent the bearish investors scurrying for the exits and boosted the stock. From January to April, SWY tacked on more than 60%.
Those rumors returned later in the year with talk of yet another buyout lifting shares more. As a result, after a sleepy summer, Safeway stock has jumped up about 25% in the last few months to give it one of the best returns in the entire S&P 500 year-to-date.
But there’s simply no way this can last. Either Safeway will be bought out or it won’t -- and while there is a small chance of a premium above current pricing, it’s not enough to lock yourself into this investment considering the other opportunities out there.
In addition to these, we look at two more potential "Cinderella stocks" to sell here.
More From InvestorPlace
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- The World's Hottest Trends, and How to Play Them
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here.
Well I do have to agree with the Author....These stocks/companies have had some terrific runs and appear to be in overbought territory...
But in some cases, buyers and investors should be looking back at where they came from...?
2 and 3 "baggers" on cheap stocks, usually spell trouble sooner than later...
And yes, now is probably a good time to sell and move on...Greed seldom pays in the long run.
And Twitter, don't have any idea what is really driving it the last couple days, but any holders of the recent IPO have made a butt-load of money or added to the booty, the last two days.
Well, I still owe Veteran Lender for his investing rule that price per share should never be over 7 to 10 times earnings per share. Wise advice.
And that's why I love Conoco.
I must say that SAFEWAY does not surprise me. Have you felt their latest SCAM at their Pumps.
They advocate for spending a specific amount of dollars to gain 10 cent 20 cent 30 cent or more cents per gallon off from 1 gas tank fill. Sounds great right, King Scoopers is doing it too. Yet at SAFEWAY GAS PUMPS in fine print on the pump, one which needs your glasses to find it and read it and if you don't you won't know that they are charging you 10 cents more on the price to gain your reward.
This is a SCAM and SCAMS ARE ILLEGAL in the US of A!
Thus once I found this out 2 weeks ago, I refuse to shop at Safeway anymore with the exception of bananas for theirs are better than King Scoopers!
THUS KNOW THAT AS YOU SHOP AT SAFEWAY AND SPEND MORE TO GAIN THAT GAS DISCOUNT THAT THEY SCAMMING YOU AT THE PUMP BY RAISING THE ADVERTISED GALLON PRICE BY 10 Cents!
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