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All Contents © 2019The Kiplinger Washington Editors
By Tom Taulli
| November 9, 2016
George Soros. Carl Icahn. Stanley Druckenmiller. They’re some of the world’s most successful investors. And they’ve also been bearish on the markets.
We haven’t had a major break to the downside yet, but we’ve certainly seen deterioration.
Given how much event risk the market’s about to chew on, this might just be the calm before the proverbial storm.
Every week brings a new surprise, which makes it tough to gauge who might prevail. And even when a winner is declared on Nov. 8, the outcome might very well be contested — and that would wreak havoc on the markets. Remember the rancorous presidential election in 2000, which ultimately dampened the economy?
If the markets take a dive, then, you’ll want to have a ready list of stocks to sell from your portfolio. Here are seven potential losers that you should keep on a short leash.
Andy Melton via Flickr
When the economy slows, companies typically cut back on advertising before most other things. It’s easy to do, especially when it comes to digital platforms.
This should scare the pants off of anyone holding Twitter Inc. (TWTR).
Revenue growth has already been decelerating. In the latest quarter, TWTR was only able to muster an 8.2% increase in revenues, down from 50%-plus in the same period a year ago. The heart of the problem is a lack of user growth. In Q3, Twitter added a mere 4 million monthly active users (MAUs) for a total of 317 million. That’s just more than 1%!
Twitter had no choice but to scale back operations, reducing the workforce by 9% and dumping apps like Vine.
Meanwhile, Twitter’s rivals — like Facebook Inc. (FB), Alphabet Inc. (GOOGL, GOOG) and even fast-growing Snapchat, which is likely to go public in the first half of next year — are not holding back. They’re investing heavily in their platforms, which will result in outsize gains from the revenue opportunity in times of economic growth.
Twitter, which appears to be more of an afterthought for advertisers, is in a tough spot. And worse, the chance of M&A salvation has passed, with companies like Alphabet, Walt Disney Co. (DIS) and Salesforce.com, Inc. (CRM) taking a well-publicized pass.
Rich via Flickr
A stock market crash will almost certainly impact the brokerage operators as trading volumes dry up.
True, the current handful of publicly traded brokerage firms are solid companies, with strong brands and diverse product offerings. But as the 1987 crash taught us … well, that won’t matter much. So if we do get another implosion, who should you unload?
Well, a good pick would be TD Ameritrade Holding Corp. (AMTD), which trades for a slightly stretched 21 times earnings and heavily depends on commissions and trading fees. They’re about 41% of overall revenues, which compares to Charles Schwab Corp’s (SCHW) 11%. And AMTD’s recent agreement to buy Scottrade will bolster the trading revenue dependence.
The brokerage industry faces other issues, too, such an investors’ increased focus on passive index funds, which generally sport lower fees. The proliferation of smartphones and cloud-based technologies has accelerated this trend because of the growth of robo-advisors. Yet only 11% of AMTD’s revenues come from advisory-based sources.
Naoko Takano via Flickr
The IPO market has seen a nice resurgence lately. But if the markets crater, then activity will quickly evaporate. The fact is that the IPO market is extremely sensitive to volatility. As I’ve noted before: Whenever the markets catch a cold, IPOs get pneumonia.
In other words, it would be a good idea to lighten up on high-fliers, such as Twilio Inc. (TWLO). Granted, the stock has already shed a lot of its value; it’s down roughly 50% since reaching all-time highs in late September. Worse, the tech-heavy Nasdaq was down just about 2% over this time.
This isn’t implying that Twilio is somehow a bad company. It’s not. In fact, it has a strong core business that allows for various communications in mobile devices. Its marquee customers include Facebook’s WhatsApp and Uber, so Twilio, as a business, will be fine.
But even amid the recent selloff in TWLO shares, the valuation is a thick 13 times sales. To put this into perspective, New Relic Inc. (NEWR) — a similar fast-growing cloud operator — trades at about 8.5x.
8inc. via Wikipedia
Another potential pitfall of a sudden drop in the markets is the “wealth effect.” Certain consumers will get more hesitant in making discretionary purchases, especially for high-ticket items.
The wealth effect may be muted since many Americans don’t hold much in the way of equities, but still, many wealthy people do — and it only takes a few to really cut into the companies that sell luxury products.
A company like Coach Inc. (COH) will almost certainly feel the pressure. In fact, growth has already been tough to gin up, with North American sales down 3% in the latest quarter.
Coach is also facing some structural issues. Digital operators like Amazon.com, Inc. (AMZN) are eating into the market share of traditional brick-and-mortar department stores like Macy’s Inc. (M) and Nordstrom, Inc. (JWN), which are key distributors for Coach.
Changing demographics are weighing on COH, too, as the Millennial generation is not particularly hungry for branded handbags and accessories.
Courtesy U.S. Steel
Cyclical stocks often get crushed when the economy slows. Companies like steel producers and auto manufactures can lose tremendous amounts of money, especially since there are massive fixed costs, like operating factories.
A classic example is United States Steel Corporation (X).
While most companies suffered perilous stock drops during the financial crisis, U.S. Steel was among the worse. Shares plunged from $187 to $20, and this came after a major bull move to boot.
This time around, X has again made a strong push to the upside, returning more than 140% so far in 2016. Thus, U.S. Steel could be set up for another brutal fall if the markets start to tank.
Just this week, U.S. Steel lowered its full-year guidance. The outlook calls for a loss of $2.26 a share — after the company forecast a 34-cent profit in July! There’s plenty to blame, including outages and increases in maintenance. That dovetails into another problem — U.S. Steel still needs to invest large amounts of money to modernize its plants.
So, digital advertising can slip hard during a market crash, as can cyclical stocks.
What happens to a stock that has a little of Column A and a little of Column B?
That’s the problem with TrueCar Inc. (TRUE), which makes money from ad fees on the purchase of automobiles. TrueCar has already been struggling of late, forcing the company to bring in a new CEO.
The main issues has been the difficulty in managing relations with dealers, such as Autonation, Inc. (AN), that have concerns about the way TRUE puts together its ratings.
The new CEO is taking swift action to change course, but this will be a tough transformation to make. Meanwhile, growth has been dismal, with TRUE’s revenues inching up a mere 2% while net losses reached $14.7 million.
TrueCar also must deal with rivals including pure plays like AutoTrader.com, Cars.com and Edmunds, as well as more diversified players including Alphabet and eBay Inc. (EBAY). Even dealers are investing in their own digital efforts, which could lead to less demand for ad services.
Mike Mozart via Flickr
When consumers tighten their budgets, a common first move is to clamp down on restaurant visits. Because depending on the locale, the savings can really add up.
If this happens to the U.S. economy specifically, things could get ugly. That’s because the restaurant industry — especially in the fast-casual segment — has undergone aggressive growth in building new locations. According to research from the NPD Group, the growth rate has been 7.3% from 2006 to 2014, which compares to a 6.9% annual rate of growth for the U.S. population.
There are other pressures, such as the increase in minimum wage across many states, and even the emergence of startups like Blue Apron, which deliver prepared meals.
One of the best restaurant stocks to dump if this comes to pass would be Chipotle Mexican Grill, Inc. (CMG).
More than any other player in the fast-casual space, Chipotle has been all about aggressive growth. And that came at a dire cost: quality problems such as the outbreaks of E. coli and salmonella that devastated the company’s sales. The latest quarter saw same-store sales plunge by 22% — which was a relative relief compared to a couple quarters ago — and that was despite its aggressive program to essentially give away food!
Moreover, despite the fact Chipotle stock has been cut in half over the past year-plus, CMG stock still trades at nearly 40 times earnings. By comparison, Jack in the Box Inc. (JACK) and Chuy’s Holdings Inc. (CHUY) trade at nearly half that, at 20 and 23 P/Es, respectively.
So yes, CMG stock has farther to fall.
This article is from Tom Taulli of InvestorPlace. As of this writing, he did not hold a position in any of the securities discussed.
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