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All Contents © 2019The Kiplinger Washington Editors
By Vince Martin
| May 10, 2017
Through four months and a little change, 2017 has been a good year for the broader indices. Scores of hot stocks have driven the S&P 500 more than 7% higher year-to-date, and the Nasdaq Composite is even better, gaining more than 13%
Large-cap gainers like Apple Inc. (AAPL) — which is up 29% in 2017 and literally moves markets — have driven much of the headline gains.
But the market’s strength in 2017 has been broad as well. A quick screen shows that some 560 different stocks have risen 30% or more year-to-date. Some of those gains are well-deserved, but others look more like a case of a rising tide lifting even leaky boats.
Here are 10 hot stocks that are boasting big — and perhaps undeserved — gains so far in 2017. All 10 seem likely to see a reversal before the year is out, so make the smart move and lock in your gains before they’re gone.
Prices and data are from the original InvestorPlace story published on May 8, 2017. Click on ticker-symbol links in each slide for current prices and more.
Consumer products giant Unilever NV (UN) performed reasonably well coming out of the financial crisis. UN shares outperformed those of rival Procter & Gamble Co (PG), and its returns were relatively close to that of the S&P 500 — solid performance for a low-risk, low-volatility issue.
Unilever stock dipped in late 2016, however, as a pricing dispute with U.K. grocer Tesco PLC (TSCDY) and soft earnings pressured the stock. But shares soared after Kraft Heinz Foods Co. (HNZ) made an unsolicited $143 billion takeover offer — and UN has continued to climb ever after rejecting that deal.
Unilever’s shares have now risen more than 30% year-to-date — a huge move for a low-growth company still facing risks from Brexit. Above $53, UN trades at a 6%-plus premium to the Kraft Heinz offer, and 40% above levels reached as recently as late November.
In other words, an awful lot of optimism is priced in at this point. Probably too much. A raised dividend is nice, but this still is a company targeting 3%-5% growth trading at 26 times earnings.
Unilever isn’t a short candidate in this market, but investors have wrung far more profits in short order than they could have expected. Don’t get greedy.
A year ago, Symantec Corporation (SYMC) stock was trading around $17. The company was about to release disappointing fourth-quarter results showing a 10% decrease in revenue and a 21% decline in non-GAAP earnings. SYMC stock traded at its lowest levels in nearly four years. After selling its Veritas business to private equity, SYMC looked dangerously reliant on a declining consumer business for profit going forward.
Symantec’s shares have almost doubled since then, largely due to the acquisitions of Blue Coat Systems and LifeLock for roughly $7 billion combined. However, SYMC has added more than $9 billion in value over the past year. Accounting for debt added to the balance sheet, that seems like too big a move. It implies that Symantec paid half-price for both acquisitions and added 25% to its own legacy enterprise value over the past year.
It’s simply too big a run for a company that still has major concerns.
Alphabet Inc. (GOOGL) engineers have previously called out “potentially devastating” flaws in Symantec’s Norton antivirus software. Virus protections in Google Chrome, Mozilla Firefox and other browsers limit the need for Norton products. LifeLock has had issues of its own — including two different FTC settlements — and Symantec reportedly only bought Blue Coat after trying to buy FireEye Inc (FEYE) first.
There was room for upside in SYMC stock, but that upside has been captured, and then some. Even assuming the sum is greater than the parts, it’s difficult to argue at this point that the sum is that much greater.
Michael P. Kube-McDowell via Wikimedia
Two factors have made CSX Corporation (CSX) one of the year’s hottest stocks at nearly 45% gains so far this year:
An activist effort resulted in the hiring of CEO Hunter Harrison. Higher coal prices helped sentiment around the company, and contributed to a solid Q1 earnings beat last month.
That seems a somewhat shaky foundation for a rise that has added more than $15 billion to CSX’s market capitalization. Harrison did do a tremendous job with Canadian Pacific Railway Limited (USA) (CP), one reason why his move to CSX has been so well-received. But even there he added less than $15 billion in value across five years — and CP stock has pulled back by about 25% from late 2014 peaks.
That pullback has been driven by lower demand for shipments of coal and oil, in particular. That weakness is likely to persist across the industry for the long-term. A short-term rebound in coal prices doesn’t change that problem.
Certainly, there was reason for optimism regarding Harrison’s hire — but a 45% gain in a stodgy railroad company prices in that optimism, and ignores factors that even Harrison can’t fix.
WEI WEI via Flickr
Long-time underperformer BlackBerry Ltd (BBRY) has spiked of late, climbing 35% just since late March. A solid Q4 earnings report and an arbitration win against Qualcomm, Inc. (QCOM) both provided upside catalysts for BBRY stock.
Of course, we’ve seen these moves before in BlackBerry — a stock which has been range-bound for some four years now. And with the company’s hardware division now gone, cost-cutting largely complete and the company still barely profitable, the perception of BBRY has moved from value play to growth stock.
That could be a problem for BBRY going forward. Management guided double-digit growth for software and service revenue this year. But service access fees are declining and will pressure profits.
BlackBerry has earned its place among 2017’s hot stocks thanks to more than its share of positive headlines, but there’s not enough growth to support much more upside.
Valder137 via Wikimedia
TrueCar Inc. (TRUE) looked like another busted Jobs Act IPO barely a year ago.
What was pitched as an innovative improvement on the car-buying process instead appeared to be a business model that didn’t actually make any sense. The company was barely profitable, and TrueCar itself said in its Q4 2015 earnings release that it would “focus on the perception some dealers and automakers have of the company.”
And yet, TRUE truly is among the best of 2017’s hot stocks. Shares have more than tripled off early 2016 lows, including nearly 40% gains year-to-date.
This run looks unsustainable at this point.
The company itself, along with major shareholders, sold 9 million shares last month at $16.50, $1 below where TRUE stock currently trades. Admittedly, TrueCar’s perception with dealers has improved, and 2017 guidance looks solid. But TRUE still trades at roughly 65 times 2017 EBITDA guidance on an enterprise basis. That multiple assumes years of growth ahead for the company.
Of course, TRUE’s valuation is rising at the same time those of auto manufacturers are falling. “Peak auto” concerns have kept a lid on shares of both Ford Motor Company (F) and General Motors Company (GM). The idea that industry weakness won’t impact TRUE at all seems far too optimistic, and its performance seems contradicted by the weakness at F and GM.
In that context, it’s no surprise to see rising short interest in TRUE stock.
TrueCar has executed a solid turnaround — but with the stock pricing in years of additional growth in a tough industry, it simply looks overvalued at this point.
Isaac Wedin via Flickr
With respect to Will Ashworth, who listed Ollie’s Bargain Outlet Holdings Inc. (OLLI) as one of the best growth stocks you can buy now, in this market, any retail stock making huge gains seems like an anomaly.
And OLLI is already up 44% so far this year.
To be fair, Ollie’s sits in the one area of retail that has shown some strength: off-price. TJX Companies Inc. (TJX) and Ross Stores, Inc. (ROST) have been outstanding long-term performers. And the best comparison for OLLI probably is Burlington Stores Inc. (BURL), which has used a combination of same-store sales growth and new stores to nearly double since late May 2016.
Even in that context, however, OLLI is starting to look stretched.
This hot stock trades at 35 times the high end of FY17 guidance, with the year benefiting from an extra week. That compares to 26x at BURL, a company whose comps performance last year actually was stronger than that of Ollie’s (4.5% vs 3.2%).
OLLI is far from trash, but the current price seems a bit high. Ollie’s will have to be discounted — heavily — at some point this year.
Ed! via Wikimedia
Most of the 35% YTD gains in Select Comfort Corp. (SCSS) came on a one-day 28% jump in mid-April after the company’s first-quarter earnings report.
And it sure seems like those gains came from investors looking backwards – not forwards.
After all, Q1 earnings were strong, giving some reason for near-term optimism. Looking forward, however, risks to the mattress industry as a whole abound at the moment. The most notable is the increasing penetration of e-commerce and niche brands like Casper, Leesa, Tuft & Needle and others. These companies — backed by plenty of VC cash — offer “test drives,” direct delivery and pricing that often undercuts majors like SCSS.
Meanwhile, the legacy brick-and-mortar industry was shaken by news from Tempur Sealy International Inc. (TPX) in January. TPX stock plunged — taking SCSS with it — when it announced it had terminated its contract with retailer Mattress Firm. The same terms Tempur Sealy found untenable seemed likely to impact margins at other Mattress Firm customers, including Select Comfort. And it opened the door for other retailers to be more aggressive as they protect turf and profits from online interlopers.
And yet SCSS now trades at 22 times the midpoint of 2017 EPS guidance — a multiple that incorporates few, if any, of its challenges going forward. A strong housing cycle might help. But it’s hardly guaranteed that Select Comfort can maintain enough share to drive the growth needed to support the multiple.
Any earnings miss, meanwhile, will likely send SCSS into a tailspin given investor caution toward the space as a whole.
Even after a bit of post-earnings weakness over the past week, Tesla Inc. (TSLA) still has gained 44% through the first few months of 2017. And the long-term case for Tesla as a truly revolutionary company still holds.
But it wouldn’t be surprising to see Tesla stock take a breather over the next few months. Valuation is stretched, with Tesla famously passing both Ford and General Motors stock in terms of market capitalization. Model 3 numbers look solid, but little news is on the way over the next few months.
Meanwhile, most TSLA shareholders are solidly in the money. Some profit-taking here and there simply wouldn’t be a surprise. Tesla shorts aren’t going anywhere, and any broad market weakness could bring Tesla down with it.
A correction in Tesla wouldn’t be the end of the world, and it would provide a buying opportunity for long-term bulls. But with TSLA stock still over $300, a correction surely wouldn’t be much of a surprise.
Restoration Hardware via Wikimedia
RH (RH), better known as Restoration Hardware, has had one of the biggest roller-coaster rides in the market over the past few quarters.
In late 2015, RH was at the end of a steady run that had propelled its price above $100. Within a matter of months, the stock was below $40. RH finally bottomed around $25 in February — it has since gained 130% and climbed back to $58.
Execution errors hurt the company on the way down, including delayed shipment of catalogs. RH’s transition to a membership model — somewhat similar to that of Costco Wholesale Corporation (COST) — has caused disruption as well. But a strong Q4 and better-than-expected guidance for FY17 EPS of $1.78-$2.19, along with a heavy share repurchase authorization, have buoyed RH shares.
Here, too, it looks like a case of too far, too fast.
Smaller rival Hooker Furniture Corporation (HOFT), like RH, cited the end of the U.S. presidential election as driver of demand. But that pent-up demand won’t last forever, or even for more than a quarter or two. The EPS guidance looks very strong against year-prior figures: ~$2 at the midpoint, against $1.27 in FY16. But a chunk of the growth is coming from share repurchases, and guided adjusted net income of ~$73 million still sits 35%-plus below FY15 levels of $115 million.
And yet, RH stock now trades at 29 times FY17 guidance, implying a sudden return to growth that simply doesn’t look supported by the numbers. Rather, turnaround hopes, plus the impact of the buyback authorization against a huge short interest, have spiked the stock.
Across the board, the catalysts for RH stock should moderate quickly. That in turn will bring the stock back to more normalized (read: lower) levels.
Carbonite Inc. (CARB) was a go-nowhere tech stock until the last few quarters. The company’s legacy consumer-facing data backup software is declining, with the company guiding for 2017 revenue to be flat to down 10%.
Yet off the back of two relatively small acquisitions, CARB stock has tripled since early 2016, including a 30% gain YTD.
The moves don’t make a ton of sense.
Carbonite acquired eVault from Seagate Technology PLC (STX) for just $14 million last year. It bought Double-Take Software from private equity for $65 million. Yet – in echoes of the move at SYMC — it has added some $400 million in market value.
To be fair, Carbonite has had some success in the SMB space, and EPS is guided up nicely this year to 74-80 cents from 60 cents a year ago. But much of that growth is coming from buybacks and acquisitions, and CARB now trades at 27 times the high end of the guidance range.
With the core business still in decline, that multiple seems to imply an impressive amount of growth and enormous value accretion from relatively small acquisitions. That, in turn, seems to imply that CARB stock is more likely to disappoint than to outperform as 2017 rolls along.
This article is from Vince Martin of InvestorPlace. As of this writing, he held none of the aforementioned securities.