BALTIMORE (Stockpickr) -- A rising tide lifts all ships -- except the ones with holes in the hull. They still sink regardless.
That's why it's so important to stay vigilant in a bull market. Plenty of damaged stocks can appear to get lifted by a buoyant market, only to put your portfolio underwater when Wall Street catches onto the holes.
Sure, a weakening stock can get floated higher temporarily by indiscriminate buyers in a bull market, but that doesn't carry over when the bears come out. When the broad market's in a downtrend, deteriorating firms are all but guaranteed to get sold off hard. The challenge, then, is to know what to look for before your shares get shellacked.
So today, we'll attempt to spot the red flags in four big names.
We're looking at a combination of highfalutin metrics that point to money problems for companies. To make our list, a stock has to has to meet three out of these four red flag criteria: a bankruptcy prediction formula called Altman's Z-Score that registers at less than 1.8, indicating financial distress; rising CDS spreads, indicating that institutional investors are pricing in a higher probability of bond default; and dropping sales and inventory turnover.
That quantitative approach to finding out red flags avoids the bullish bias that's historically put blinders on investors. So, without further ado, here's a look at four red-flag names to sell this fall.
Navistar
There's no question about it: 2013 has been a stellar year for shares of Navistar (NAV). Since the first trading day of January, shares of the heavy vehicle maker have jumped 57%. But with red flags flapping in this stock's financials, anxious shareholders may want to think about taking some gains off the table.
Navistar is a leader in the heavy vehicle business. Its brands include flagship International, as well as Monaco Coach and MaxxForce engines, giving NAV market-leading positions in three quarters of its business lines. But it's a company that's well-positioned in an extremely challenging industry. Economic headwinds continue to be a problem for NAV, especially as defense budgets get cut and high oil prices spur more shippers to go with rail transport. While the commercial vehicle fleet is aging, uncertainty could convince owners and operators to prolong use of older trucks.
Navistar has a long track record of destroying shareholder value, and failing to meet deadlines. While a recent management shakeup in 2013 could help NAV turn a new leaf, other headwinds, like a pension plan that's underfunded to the tune of $1.4 billion, could leave the new managers with few options. Debt has nearly doubled in the last two years -- and lenders are hiking NAV's cost of capital in turn.
At the very least, buyers should wait for more of a management track record before thinking about building a position in this name.
J.C. Penney
Don't let J.C. Penney's (JCP) household name status fool you: This stock has some serious problems on its hands.
J.C. Penney is a national department store chain that's been in flux for the last several years. The firm has a massive footprint -- more than 1,100 stores at last count -- and it's an anchor store at almost every mall in America. But big scale isn't a good thing when you're hemorrhaging money, and the firm's huge losses quarter after quarter should be worrying investors. While Penney's focus on providing consumers with a value proposition was a step in the right direction, the message has been muddled somewhere between the investor calls management makes and consumers' ears.
In many ways, the economic recovery is actually hurting Penney, not helping it. Upper middle class consumers are trading up to higher-end retailers at the same exact time that Penney's more price-sensitive buyers are getting squeezed out of the picture. Without a real reason to shop there, consumers won't. Since former Apple (AAPL) retail head Ron Johnson was fired from JCP's CEO role before completing the firm's brand revamp, his tenure only destroyed shareholder value. And returning CEO Mike Ullman is going to have to burn through even more cash to make Penney's image cohesive again.
The financial situation at JCP is strained. Rumors of a credit squeeze from vendors sparked a selloff in JCP stock back in August, and the store chain literally can't afford another quarter like its most recent one without borrowing money. At that rate, it'll run out of cash by the fourth quarter.
Expect more volatility from JCP in 2013.
Frontier Communications
Frontier Communications (FTR) is a dividend trap. Right now, the $4.3 billion communications firm pays out a whopping 9.2% yield. Yes, telecoms are known for hefty dividend payouts, but FTR's yield is ridiculous. Last quarter, for example, Frontier paid out more cash in dividends than it earned in all of the last year. That's not sustainable.
Frontier is the phone and internet provider for 2.9 million customers in 27 states. The firm transformed its business dramatically in 2010, when it acquired Verizon's (VZ) fixed line business in 14 states, a move that took the worst of Verizon's dragging fixed operations off of its books and moved them onto Frontier's. As a result, customer attrition is a big risk that's showing itself on FTR's top line. A huge debt load doesn't help things either -- if Frontier can float its dividend payout on for much longer, it'll be impressive.
FTR is no stranger to dividend cuts, and investors should hit the escape hatch before the next one hits. Frontier, after all, is a company whose price is largely predicated on its dividend. A cut will mean a disproportionate drop in share price.
JetBlue
Richard Branson once joked that the best way to become a millionaire was to be a billionaire and buy an airline. JetBlue (JBLU) shareholders should heed the warning. For full disclosure, JetBlue was a name I had recommended to clients in 2011 -- but we took the position off the table in the first quarter of this year as it staged a financial about-face. And it's been headed lower ever since.
To be clear, JetBlue isn't the worst company in the world. But the headwinds in the airline industry coupled with small-cap scale are making it more challenging than ever to compete with the big boys. And the big boys are only getting bigger -- industry consolidations are creating larger airlines than ever before that are better able to cut costs across massive networks. While increased routes have boosted JBLU's revenues, profitability has been tenuous thanks to growing maintenance and repair costs. Despite incurring the costs one of the youngest fleets in the airline business, it costs more than ever to keep those planes flying.
And JBLU needs to keep those planes flying if it wants to pay for those leases. The one-two punch of huge ongoing lease obligations and low margins makes this a tough stock to love. There was a time when I liked JetBlue a lot (and I certainly wouldn't recommend shorting it with the headline risk of an acquisition) but the red flags are waving too blatantly to ignore in 2013.
To see these stocks in action, check out the at Red Flag Stocks 2013 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
No comments:
Post a Comment