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Ford stock may look cheap to low-information investors, but F shares still have a long way to go before they inevitably hit zero.

  • Ford stock is poised for a painful upheaval.
  • The company is not ready for a recession because of its weak margins and heavy debt load.
  • Here are three reasons to sell the stock before it’s too late.

Ford Motor Company (NYSE: F) has long been a favorite of retirees, pensioners, and other low information investors. Despite its dirt-cheap stock price of roughly $6.00, there is still more downside in this struggling American automaker.

Here are three reasons to convince your grandpa to sell his Ford stock before shares inevitably careen to their true value: zero.

1. The Recession &Amp; Pandemic Caught Ford Off Guard

According to the National Bureau of Economic Research, the United States entered a recession in February. This is terrible news for Ford and other automakers because cars are discretionary goods. And consumers simply avoid buying them during tough economic times.

Ford is so exposed to recessions that it nearly went bankrupt during the last one. Its share price plunged as low as $1.26 in 2008. We could be looking at a repeat of that scenario.

Ford reported first-quarter earnings back in April. The results were a trainwreck. The company generated a net loss of $1.99 billion, which comes out to $0.50 per share.

Put another way, Ford burned around 8% of its market cap in losses – in one quarter. Expect the second and third-quarter results to be even worse as the company faces the full brunt of the recession.

2. The Company Already Had Razor Thin Margins

Ford is a money-burning operation. | Data by Ycharts.

Ford’s problems stem from its terrible margins. Despite generating a huge amount of revenue, the carmaker can’t convert much of this into profit because of its bloated and inefficient operational process.

Ford is trying to fix this by viciously firing thousands of employees. There’s no guarantee it’s going to work.

In its most recent filing, Ford reported an EBITDA margin of just 1.6% in its North American business. Think that’s bad? Wait till you see the international operations.

Ford reported an EBITDA margin of negative 2.3% in Europe, negative 15.5% in South America, and an eye-watering negative 40% in China.

With numbers like these, investors have to wonder why the company even exists. It’s is a debt-fueled zombie that runs off its own momentum without creating value for shareholders.

3. A Titanic Debt Load Will Crush Ford Stock

Ford’s net income is plummeting, while long-term debt is skyrocketing. | Data by Ycharts.

That brings us to the next problem with Ford: its terrible balance sheet. Despite posting consistent losses and terrible cash flow, Ford’s balance sheet is chock-full of unsustainable debt.

The automaker reported a staggering $24.4 billion in long-term automotive debt in addition to $85.5 billion in Ford credit debt.

The credit debt comes from financing car sales to consumers. This exposure will become riskier during the recession because people will struggle to pay their bills due to job losses and other challenges.

The U.S. unemployment rate currently stands at around 11.1%.

Ford will face further challenges from its high borrowing costs and interest expenses. The company paid out $214 million in automotive interest in the first quarter. This number will get higher over the long term because of recent credit rating downgrades.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.

Author: William Ebbs

Source: CCN: 3 Reasons You Need to Dump Ford Stock Before It’s Too Late

Hedge funds entered 2020 on a bit of a roll. The Preqin All-Strategies Hedge Fund benchmark delivered an 11.45% return in 2019 – only the second time the industry has registered double-digit returns since the beginning of 2014.

The pressure was on to repeat the performance in 2020. But COVID-19 hit, and all bets were off. Billionaires and hedge funds with billions in assets have spent the first part of the year trimming or completely exiting positions.

As we’ve said in looking at billionaires’ top stock picks, it’s both interesting and constructive to know what the “smart money” is doing. That’s because they boast rich resources and deep connections to insiders that can give them insights into stock picks that most other people simply don’t have. It can be equally instructive to look at what they’re unloading, and why.

Here are 25 stocks that billionaires have been selling so far in 2020. Many of those sales were stocks most likely to be affected by the virus: airlines, hotels, retailers, restaurants, casinos and other businesses that can’t make money without people physically visiting their establishments or utilizing their services. In some cases, however, the “smart money” prudently took profits on holdings that were working quite well for them. And once in a while, you’ll find that some billionaires are ditching what other institutional investors covet.

Data is as of June 14. Stocks listed in alphabetical order. Data is courtesy of S&P Global Market Intelligence, WhaleWisdom.com and regulatory filings made with the Securities and Exchange Commission.

25 Stocks That Billionaires Are Selling | Slide 2 of 26

Allergan

Woman receiving a botox injection in the eye zone lying in bathrobe on the medical couch

MARKET VALUE: N/A

BILLIONAIRE INVESTOR: David Tepper (Appaloosa Management)

SHARES SOLD: 600,000 (-46%)

David Tepper, the billionaire owner of the Carolina Panthers and the manager of hedge fund Appaloosa Management, sold 46% of Botox maker Allergan during the first quarter, reducing its weighting in the Appaloosa portfolio from 6.2% at the end of December to 3.8% at the end of March, but it remained the firm’s seventh-largest holding.

Tepper wasn’t the only smart-money manager to sell off a large chunk of AGN. John Paulson’s Paulson & Co. shed roughly 2.1 million shares, or 77% of its stake, during the first quarter.

Of course, Allergan shares don’t exist anymore. On May 8, biopharmaceutical firm AbbVie (ABBV) closed its $62 billion deal to buy AGN after clearing U.S. antitrust hurdles, creating a combined entity that should generate $50 billion in annual revenues.

“The new AbbVie will be a well-diversified leader in many important therapeutic categories, with both on-market and pipeline assets, and our financial strength will allow us to continue to invest in innovative science and continue to serve unmet medical needs of patients that rely upon us,” AbbVie CEO Richard Gonzalez said upon the deal closing. “I am proud of both organizations and look forward to the opportunities ahead.”

What’s notable about the deal is that Allergan shareholders received $120.30 in cash and 0.8660 shares of ABBV for every share held. So it appears that Tepper and Paulson alike held onto some of their Allergan stock to roll into AbbVie. We’ll see if they maintained those stakes when they report their second-quarter 13Fs, which should happen in August.

25 Stocks That Billionaires Are Selling | Slide 3 of 26

Amazon.com


MARKET VALUE: $1.27 trillion

BILLIONAIRE INVESTOR: Peter Woo (Wharf Holdings)

SHARES SOLD: 223,452 (-100%)

Hong Kong real estate billionaire Peter Woo is worth an estimated $13.3 billion. On May 25, Wharf Holdings – a 73%-owned subsidiary of Wheelock Properties, a holding company controlled by the billionaire – announced it had sold 223,452 shares of Amazon.com (AMZN, $2,545.02).

Wharf’s announcement stated that it had sold Amazon shares between Aug. 5, 2019, and May 22, 2020, at an average price of $1,975 per share. Based on an average price paid of $1,083, Wharf was locking in an 82% profit on its investment in the e-commerce giant.

The sales totaled more than $440 million, which is no small sum. However, Wharf Holdings wasn’t a huge owner; had it held on to its stake, it would have ranked as the company’s 175th-largest shareholder.

Woo announced in February plans to take Wheelock Properties private, offering to buy the holding company’s stock he doesn’t already own for HK$12 per share. As part of the offer, Wheelock would distribute to its shareholders the company’s ownership interest in Wharf Holdings and its sister company, Wharf REIC, which have a market value of HK$124 billion.

“It’s a win-win-win situation for all three businesses, given the current situation that the global economy finds itself,” Justin Tang, head of Asian research at broker dealer United First Partners, said about the privatization. “Once this coronavirus (outbreak) clears, the Hong Kong protests might start again, so minority investors may think this (is) a good bail out deal.”

25 Stocks That Billionaires Are Selling | Slide 4 of 26

Anthem

Indianapolis: Circa March 2019: Anthem World Headquarters. Anthem is a Trusted Health Insurance Plan Provider (Indianapolis: Circa March 2019: Anthem World Headquarters. Anthem is a Trusted Health Insurance Plan Provider, ASCII, 110 components, 110 by

MARKET VALUE: $67.0 billion

BILLIONAIRE INVESTOR: Chris Hohn (TCI Fund Management)

SHARES SOLD: 3,138,793 (-78%)

TCI Fund Management, which is short for The Children’s Investment Management, is a U.K. investment advisor and hedge fund run by billionaire investor Chris Hohn. TCI managed more than $30 billion for clients heading into 2020 and destroyed the hedge fund competition in 2019, generating a 41% return. That’s almost four times the hedge fund average.

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In TCI’s March 31 13F filing, TCI revealed it had sold 78% of its holdings in health insurance plan provider Anthem (ANTM, $265.74), reducing its remaining holdings to about $170 million, or just 0.81% of the $21.1 billion listed in its 13F.

Anthem was a recent purchase, with TCI Fund Management entering its stake in the second quarter of 2019. The same quarter, it launched a pharmacy benefits manager, IngenioRx. During the first quarter of 2020, the PBM generated $5.2 billion in revenue and operating profits of $349 million. Investors can expect this segment of its business to grow dramatically.

TCI might not have made much of a profit on ANTM, however; even if it sold at the Q1 2020 peak, Hohn would’ve enjoyed a 14% gain in that case – but depending on when it sold, it might have yielded a smaller return or even losses.

TCI made several sales throughout the quarter, including complete exits of stakes in TransDigm Group (TDG) and Northrop Grumman (NOC).

In case you’re wondering about Hohn’s favorite stocks, two of his top five are Canadian railroads: Canadian Pacific (CP) and Canadian National Railway (CNI), which combined account for over $4 billion in assets.

25 Stocks That Billionaires Are Selling | Slide 5 of 26

Bank of New York Mellon

NEW YORK – JUNE 09: Bank of New York Mellon Corp. headquarters are seen June 9, 2009 in New York City. Bank of New York Mellon Corp. is one of ten lenders that won U.S. Treasury approval to pay back $68 billion in funds from the Troubled Asset Relief Program (TARP). (Photo by Mario Tama/Getty Images)

MARKET VALUE: $34.0 billion

BILLIONAIRE INVESTOR: Nelson Peltz (Trian Fund Management)

SHARES SOLD: 2,453,278 (-20%)

Trian Fund Management, run by billionaire Nelson Peltz, wasn’t alone in reducing its position in banking and global investments giant Bank of New York Mellon (BK, $38.44) during the first quarter. A total of 369 institutions, including 55 hedge funds, cut bait on the company.

Trian reduced its ownership by 20% in the first three months of the year to 9.7 million shares. But BK remains Trian’s sixth-largest holding, at 4.7% of the $6.9 billion equity portfolio. It sits behind more Peltz-like holdings including Procter & Gamble (PG), Sysco (SYY) and Mondelez (MDLZ).

Like most financial companies, Bank of New York Mellon has had a miserable 2020. BK shares are off 23.6% year-to-date – about a percentage point behind the broader financial sector, as measured by the Financial Select Sector SPDR ETF (XLF). It’s likely Peltz was trying to lock in some of the gains earned since Trian entered the position during Q1 2014.

An interesting note: In June, the SEC awarded $50 million to a former Bank of New York Mellon trader who tipped off the commission about the bank overcharging large clients on currency trades. The award is the single-largest in the history of the whistleblower program.

25 Stocks That Billionaires Are Selling | Slide 6 of 26

Berkshire Hathaway

WASHINGTON – MARCH 13: Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., participates in a panel discussion, “Framing the Issues: Markets Perspectives,” at Georgetown University March 13, 2007 in Washington, DC. Treasury Secretary Henry Paulson hosted the “Treasury Conference on U.S. Capital Markets Competativeness,” a day-long program to focus on capital market issues like regulation, competition and other related topics. (Photo by Chip Somodevilla/Getty Images)

MARKET VALUE: $440.3 billion

BILLIONAIRE INVESTOR: Bill & Melinda Gates (Bill & Melinda Gates Foundation Trust)

SHARES SOLD: 5,000,000 (-10%)

The bad news (if you’re Warren Buffett): During the first quarter of 2020, Bill and Melinda Gates’ foundation sold 5 million shares of Buffett’s Berkshire Hathaway (BRK.B, $181.21).

The good news: While that sounds like a large number, the foundation still held 44.9 million shares as of the end of the first quarter. That 1.8% stake in Berkshire Hathaway still makes up 47% of the foundation’s assets, so clearly Bill and Melinda Gates haven’t soured on the Oracle of Omaha.

This is a great example of why it pays to look further into billionaire stock sales and purchases.

The Gates Foundation’s transaction was part of a planned sale set up in 2017. The foundation said that over a roughly three-year period, it would sell 60 million shares of Berkshire stock that Warren Buffett had donated as part of his 2006 commitment to give away close to 100% of his wealth to charity.

“In my entire lifetime, everything that I’ve spent will be quite a bit less than 1% of everything I make. The other 99%-plus will go to others because it has no utility to me,” Buffett said at the time. “So it’s silly for me to not transfer that utility to people who can use it.”

The less privileged have benefited from Buffett’s grand gesture ever since.

25 Stocks That Billionaires Are Selling | Slide 7 of 26

Boeing

Boeing Factory workers assemble Boeing 787 airliners at the Boeing factory in Everett, WA. This building is said to be the largest building in the world under one roof.

MARKET VALUE: $106.9 billion

BILLIONAIRE INVESTOR: Marshall Wace North America LP

SHARES SOLD: 1,304,102 (-99%)

London-based investment advisor Marshall Wace got its start in 1997. As of 2019, it managed $39 billion in assets. It brought on KKR & Co. (KKR) as a 25% partner in 2015 and has since pumped that percentage up to 40%.

Following the paper trail for Marshall Wace takes a bit of patience. That’s because it has two 13F forms. One is for Marshall Wace LLP. The other is for Marshall Wace North America LP. Together, they had assets of $23.2 billion at the end of March that were invested across a few thousand stocks.

Marshall Wace North America was one of numerous institutional investors to shed Boeing (BA, $189.51) stock during the first quarter of 2020. It sold off roughly 1.3 million Boeing shares during the first quarter, reducing its stake – which it initiated in Q1 2017 – to a mere 6,718 shares. It has paid an average price of $360.59 per share. But it likely did most of the selling in March, when BA fell from $275 at the end of February to a low of $95 by the third week of March. Boeing stock finished the quarter around $149 per share, well down from where it started 2020.

Also, Marshall Wace LLP sold 15,849 shares, or 66% of its holdings, to finish March with a little more than 8,000 shares.

While BA shares have recovered somewhat in Q2, the company still has a long road ahead of it. In April, Boeing reported a $641 million loss and plans to permanently cut 10% of its workforce.

25 Stocks That Billionaires Are Selling | Slide 8 of 26

Boston Scientific

NATICK, MA – DECEMBER 05: A sign on the front gate of Boston Scientific Corp. headquarters is seen December 5, 2005 in Natick, Massachusetts. The company offered $25 billion for Guidant Corp., $3 billion more than what Johnson & Johnson agreed to pay last month. (Photo by Joe Raedle/Getty Images)

MARKET VALUE: $50.5 billion

BILLIONAIRE INVESTOR: Dan Loeb (Third Point LLC)

SHARES SOLD: 5,000,000 (-100%)

Activist investor Dan Loeb’s firm exited several positions during the first quarter – a three-month period that saw Third Point’s investments lose 16% of their value.

One of those was Boston Scientific (BSX, $35.35). The medical device company previously accounted for 2.6% of Third Point’s portfolio, the 14th-largest position at the time. It first acquired BSX shares during the first quarter of 2019 at an average price of $38.80 per share, making it likely that Third Point made a small profit or broke even over the past year.

May was a busy month for Boston Scientific. It raised $2 billion by doing preferred and common stock offerings concurrently. The common offering sold 29.4 million shares, with an option to buy 3.8 million more, at $34.25 a share. The preferred offering sold 10.1 million shares, including an over-allotment option of 1.3 million shares, of 5.5% convertible mandatory preferreds at $100 each. BSX intends to use some of the proceeds to repay the $750 million that was outstanding on its credit facility due in April 2021. The rest goes toward general corporate purposes.

Third Point’s largest position is Baxter International (BAX), another medical equipment company that made up 15% of the portfolio as of the end of Q1 2020. But it didn’t escape the scythe, either – Third Point sold 5.9 million shares, or 33% of its stake in BAX, during the first quarter.

25 Stocks That Billionaires Are Selling | Slide 9 of 26

Chipotle Mexican Grill

A Chipotle Mexican Grill location in downtown Denver, Colorado. Chipotle is a chain of Mexican themed restaurants with over 1100 locations in the U.S.A.

MARKET VALUE: $27.7 billion

BILLIONAIRE INVESTOR: Bill Ackman (Pershing Square Capital)

SHARES SOLD: 563,078 (-32%)

Billionaire hedge fund manager Bill Ackman sold more than half a million shares of Chipotle Mexican Grill (CMG, $991.83) in the month of February at prices between $859.62 and $893.42. That was roughly a third of Ackman’s position, but he remains a top-10 investor in CMG with about 1.2 million shares, or a roughly 4.2% stake.

But don’t think this is a sign of bearishness on Ackman’s part. It’s still likely one of his favorite stocks.

For one, Ackman was just prudently taking some profits on a stock he first started accumulating in Q3 2016, at an estimated average price of $386.20 per share. In fact, Ackman wanted to buy Chipotle stock in March when it fell to $465 but was unable to do so because Pershing Square has a person sitting on the restaurant chain’s board. He called his hamstringing “the only big frustration” of the first quarter.

One other big sale by the hedge fund came in May, when Pershing Square unloaded its $1 billion investment in Berkshire Hathaway to raise cash to put to work in case the markets corrected again. That came after Pershing actually upped its investment in BRK.B during Q1, adding 1.4 million shares to the 4.02 million it held at the end of 2019.

An additional reason for unloading Berkshire stock: Ackman was disappointed that Buffett didn’t put its big cash hoard to use over the year he owned BRK.B.

25 Stocks That Billionaires Are Selling | Slide 10 of 26

Comcast

November 4, 2018 Sunnyvale / CA / USA – Comcast Cable / Xfinity service van driving on the street. Comcast is the largest home internet service provider in the United States.

MARKET VALUE: $180.1 billion

BILLIONAIRE INVESTOR: 3G Capital

SHARES SOLD: 4,094,556 (-100%)

3G Capital, for those unaware, is the Brazilian private equity firm that has made huge, leveraged acquisitions in consumer favorites such as Anheuser-Busch InBev (BUD), Restaurant Brands International’s (QSR) Burger King and Kraft Heinz (KHC). It manages more than $26 billion in assets for clients.

The first quarter of 2020 saw 3G exit several communications investments, including Comcast (CMCSA, $39.46). It first acquired shares in CMCSA during the first quarter of 2018 at an average price paid of $38.63. Thus, 3G likely made money on its investment, but not as much as you’d like to have earned over a four-year investment.

Comcast stock was downgraded to Neutral (equivalent of Hold) in mid-May by Guggenheim analyst Mike McCormack. The analyst feels NBCUniversal will face major headwinds for the remainder of the year due to COVID-19 affecting revenues at its theme parks, filmed entertainment and advertising.

3G also sold out the hedge fund’s position in Fox A Class (FOXA) and Fox B Class (FOX) shares, as well as Charter Communications (CHTR) during Q1. Its largest position is now Carvana, an online used car retailer that makes up 17.6% of the equity portfolio.

25 Stocks That Billionaires Are Selling | Slide 11 of 26

EchoStar

TV uplink

MARKET VALUE: $3.0 billion

BILLIONAIRE INVESTOR: Greenlight Capital

SHARES SOLD: 677,000 (-100%)

David Einhorn’s Greenlight Capital was the third-biggest seller of EchoStar (SATS, $30.28) stock in the first quarter behind Putnam Investments and Thornburg Investment Management.

Greenlight completely exited its position in EchoStar and six other stakes in Q1. The biggest splash of those sales was Einhorn’s exit from a 6.1-million-share position in General Motors (GM).

As for EchoStar, Greenlight entered the satellite communications and internet services provider during the fourth quarter of 2018. The hedge fund paid an average share price of $37.55 for the provider of satellite broadband services. If Einhorn was able to exit the position early in the first quarter when it was trading near $43, Greenlight would have made a tidy profit. If he sold closer to mid-March, when SATS was trading below $27, he might have suffered a considerable loss.

EchoStar recorded a 2% increase in first-quarter sales to $465.7 million, but operating income plunged 62% to $10.6 million.

As for Einhorn? He has had a rough year, with his Greenlight Capital funds down 16.6% through the end of May.

25 Stocks That Billionaires Are Selling | Slide 12 of 26

Facebook

MARKET VALUE: $651.2 billion

BILLIONAIRE INVESTOR: Peter Woo (Wharf Holdings)

SHARES SOLD: 2,576,491 (-100%)

Facebook (FB, $228.58) was the second of Wharf Holdings’ FAANG sales.

The company announced May 25 that it sold almost 2.6 million shares of Facebook stock at an average selling price of $195. As with Amazon, it sold the shares on several occasions between Aug. 5, 2019, and May 21, 2020, for net proceeds of $503 million.

Given that Wharf Holdings paid an average of $175.82 a share, that translates into a less-than-impressive 11% return.

Still, the gains reaped from both Amazon and Facebook might make his Wheelock Properties empire more attractive as he privatizes the firm.

Facebook itself is having one heckuva year, up 11.4% year-to-date versus a nearly 6% loss for the broader markets.

25 Stocks That Billionaires Are Selling | Slide 13 of 26

Goldman Sachs

NEW YORK – DECEMBER 16: Financial professionals laugh in the Goldman Sachs booth on the floor of the New York Stock Exchange during afternoon trading December 16, 2008 in New York City. The Federal Reserve slashed the federal funds rate, the interest banks charge each other, to a record low of zero to one quarter percent, sending stocks higher in mid-afternoon trading. Goldman Sachs announced they posted their first loss since going public in 1999. (Photo by Chris Hondros/Getty Images)

MARKET VALUE: $69.4 billion

BILLIONAIRE INVESTOR: Warren Buffett (Berkshire Hathaway)

SHARES SOLD: 10,084,571 (-84%)

Warren Buffett has exited several positions in 2020, but he also hacked away at his Goldman Sachs (GS, $201.78) stake. After selling off 84% of its investment, which he initiated in 2013, Berkshire is left with 1.92 million shares worth $387 million – the remaining reminder of Buffett’s bailout of the investment bank in 2008.

For its $5 billion lifeline, Berkshire received preferred stock that paid a 10% dividend, along with warrants to buy 43.5 million shares of its stock at $115 each. The preferred paid $1.2 billion in dividends in the three years they were outstanding. On top of that, Berkshire received a $500 million premium when Goldman redeemed the preferreds in 2011.

The warrants were renegotiated in 2013. Berkshire has bought and sold the stock in the seven years since, but Q1 was a particularly deep cut likely meant to reduce Buffett’s exposure to the banking industry.

Buffett’s most earth-shattering stock sale this year, however, came in early May when Berkshire exited its positions in America’s four largest airlines at a loss. Buffett, once opposed to owning airline stocks, bought large stakes in the airlines in 2016 and had held ever since.

“The airline business changed in a very major way. The future is much less clear to me about how the business will turn out,” Buffett said at Berkshire’s annual meeting in May.

25 Stocks That Billionaires Are Selling | Slide 14 of 26

Goodyear Tire & Rubber


MARKET VALUE: $2.2 billion

BILLIONAIRE INVESTOR: Lyrical Asset Management

SHARES SOLD: 9,203,229 (-98%)

Lyrical Asset Management, a fundamental value investor that has been managing money since 2009, manages $7.4 billion for clients, according to WhaleWisdom. And precious little of that is dedicated to Goodyear Tire & Rubber (GT, $9.42) after Lyrical shed 98% of its stake during the first quarter.

At the end of December, Lyrical owned 9.3 million shares that made up roughly 2% of the portfolio. Now it holds just 136,601 shares, which makes up just 0.02%.

So, why did it sell?

The tire producer’s sales and earnings are falling dramatically. Goodyear’s sales during the first quarter were $3.06 billion, 15% lower than a year ago. And its 60-cent-per-share adjusted loss was more than double analyst expectations for a 26-cent deficit. It’s possible that Lyrical felt Goodyear’s business was going to get worse in the second quarter and decided to redeploy the capital elsewhere.

Not every billionaire sees Goodyear’s glass as half-empty, however. During Q1, David Tepper’s Appaloosa established a new position in the tiremaker by purchasing almost 3.4 million shares of GT stock.

That’s the beauty of the markets: There are two sides to every story.

25 Stocks That Billionaires Are Selling | Slide 15 of 26

Groupon

at Meatopia hosted by Michael Symon – Food Network & Cooking Channel New York City Wine & Food Festival presented by FOOD & WINE at Pier 92 on October 18, 2015 in New York City.

MARKET VALUE: $617.6 million

BILLIONAIRE INVESTOR: P2 Capital Partners

SHARES SOLD: 18,570,778 (-100%)

P2 Capital Partners is a New York-based hedge fund that manages approximately $2.3 billion. It exited three positions during the quarter. Groupon (GRPN, $21.75) was the second-largest by stake size, at 3.3% of the portfolio; Canada’s Cott (COT), at 4.5% of the portfolio, was its biggest retreat.

P2 first bought GRPN shares during the first quarter of 2018 at an estimated price of $4.14 a share. Considering the stock traded between $3.13 and 49 cents per share during Q1, P2 Capital Partners almost certainly lost money in bailing from the discount marketplace.

Groupon is currently facing a class-action lawsuit that alleges the company violated federal securities laws by failing to disclose that its Goods category was experiencing fewer customer engagements and given the Goods segment drives sales, the company would have known that its sales were going to be materially weaker than in the same period a year ago.

GRPN currently is trading where it is because it announced poor fourth-quarter earnings in February. Worse than that, Groupon announced it was exiting the Goods category in North America during this year’s third quarter and internationally during the fourth quarter.

25 Stocks That Billionaires Are Selling | Slide 16 of 26

Hertz Global Holdings

NEW YORK, NEW YORK – MAY 23: An exterior view of Hertz Car Rental during the coronavirus pandemic on May 23, 2020 in New York City. COVID-19 has spread to most countries around the world, claiming over 343,000 lives with over 5.4 million infections reported. (Photo by Cindy Ord/Getty Images)

MARKET VALUE: $402.7 million

BILLIONAIRE INVESTOR: Carl Icahn (Icahn Enterprises)

SHARES SOLD: 55,342,109 (-100%)

You can’t hit home runs if you don’t swing for the fences.

That ought to be Carl Icahn’s motto in life. Of course, in the case of Hertz Global Holdings (HTZ, $2.83), the billionaire swung and he missed – badly.

On May 26, Icahn reported to the SEC that two of his affiliated companies (Icahn Partners LP and Icahn Partners Master Fund LP) sold 100% of their holdings in the car rental business at the bargain-basement price of 72 cents a share. As recently as March, Icahn was buying Hertz stock at prices between $7 and $8.

Icahn owned 39% of the company’s stock at the time of the sale. When it became apparent the company would file for bankruptcy, Icahn had little choice but to recoup whatever he could from the failed investment.

“Yesterday I sold my equity position at a significant loss, but this does not mean that I don’t continue to have faith in the future of Hertz,” Icahn said. “I believe that based on a plan of reorganization that includes new capital, Hertz will again become a great company.”

Icahn lost an estimated $2 billion from Hertz, or approximately 14% of his current net worth. Worse? Two weeks after Icahn exited his stake, shares briefly spiked above $6 amid rampant speculation in the stock.

Ouch.

25 Stocks That Billionaires Are Selling | Slide 17 of 26

Humana

Louisville – Circa July 2019: Humana corporate headquarters. Humana acquired a 40 percent share of Kindred at Home services II

MARKET VALUE: $50.1 billion

BILLIONAIRE INVESTOR: Larry Robbins (Glenview Capital Management)

SHARES SOLD: 723,842 (-68%)

Billionaire Larry Robbins’ Glenview Capital Management trimmed or exited several significant stakes in Q1 2020, and that included a 68% cut in health insurer Humana (HUM, $378.72) shares.

Glenview is thought to have gotten into the stock in the fourth quarter of 2018 at an average price of $267.98 a share. During the first three months of the year, Humana’s stock traded between a high of $385.00 in February and a low of $208.25 in March. Considering that, and that his remaining stake is now priced at nearly $380 per share, Robbins is likely doing OK on his investment, which remains the fund’s 12th-largest position.

On May 29, Humana filed a disclosure report with the SEC that in its meetings with investors in June, the company will reaffirm its guidance for full-year adjusted earnings of $18.50 at the midpoint. That hasn’t changed from its guidance at the end of April despite the ongoing uncertainty caused by COVID-19.

On June 5, Goldman Sachs analyst Robert Jones initiated coverage of Humana with a Buy rating and a 12-month price target of $510. The analyst believes the company’s Medicare Advantage business will continue to gain market share, resulting in multiple expansion in the future for Humana’s stock.

While Humana remains widely held among the hedge fund crowd, 315 investment firms filing a 13F reduced their HUM holdings during the first quarter, versus just 73 that added to them.

The jury’s still out.

25 Stocks That Billionaires Are Selling | Slide 18 of 26

Jacobs Engineering Group


MARKET VALUE: $10.5 billion

BILLIONAIRE INVESTOR: Ruane, Cunniff & Goldfarb

SHARES SOLD: 1,378,084 (-24%)

If you own shares of Jacobs Engineering (J, $80.49), don’t be too dismayed by Ruane, Cunniff & Goldfarb’s considerable stock sale in Q1 2020.

Yes, the disposal of almost 1.4 million shares was one of the hedge fund’s largest sales during the first quarter. But on a positive note, the global provider of engineering and construction services remains Ruane, Cunniff’s seventh-largest holding at 5.4% of the portfolio.

Besides, Ruane, Cuniff has paid an estimated $49.74 per share for Jacobs’ stock since initiating the position in Q4 2012. Given that J shares traded above $100 as recently as late February, it’s easy to understand why the smart money took some profits during Q1.

And in fact, given that the stock is trading close to $80 at the moment, any additional weakness might result in further profit-taking.

Also take heart in the company’s operational results. Q1 revenues grew 10.9% year-over-year to $3.4 billion, and adjusted earnings rose 12% to $186 million. And on May 6, the company said it expects fiscal 2020’s adjusted earnings to reach $4.80 per share – a modest 5% decline that seems fortunate considering the pandemic’s fiercer hits to other parts of the economy.

25 Stocks That Billionaires Are Selling | Slide 19 of 26

Pfizer


MARKET VALUE: $187.5 billion

BILLIONAIRE INVESTOR: Marshall Wace LLP

SHARES SOLD: 2,746,985 (-85%)

During the first quarter of 2020, Marshall Wace LLP sold 2,746,985 shares of Pfizer (PFE, $33.75), which represented 85% of its holdings in the drug company. But its North American counterpart also ditched a large slug of its Pfizer holdings, selling more than 3.4 million shares representing 42% of its holdings.

Thus, together, the two entities sold nearly 6.2 million PFE shares during Q1, reducing its overall stake in the company by 55%.

Marshall Wace LLP first added Pfizer to the portfolio in the fourth quarter of 2016, paying an average price of $37.90 a share. Marshall Wace North America LP first added Pfizer to the portfolio in Q1 2017, paying $37.38 on average.

Pfizer’s stock traded as high as $40.97 in January and as low as $27.88 in March, so it’s unlikely that Marshall Wace made much money from its latest sales.

Longtime shareholders can likely relate to that lack of reward. Over the past five years, Pfizer has a total return of 3.4%, less than half the total return of the U.S. markets as a whole.

25 Stocks That Billionaires Are Selling | Slide 20 of 26

SPDR Gold Shares

Small gold nuggets in an antique measuring

ASSETS UNDER MANAGEMENT: $63.3 billion

BILLIONAIRE INVESTOR: John Paulson (Paulson & Co.)

SHARES SOLD: 2,425,770 (-56%)

John Paulson, worth $4.2 billion at last check, cut his hedge fund’s ownership position in SPDR Gold Shares (GLD, $162.62) by 56% in the first quarter, lowering its ownership in the gold exchange-traded fund to about 1.9 million shares.

Gold lovers, fear not: GLD remains Paulson’s third-largest position.

When you consider that gold prices are up about 26% over the past 52 weeks, it’s understandable that Paulson took some of his hedge fund’s gold exposure off the table. It’s especially understandable when you consider that Paulson made a big bet on gold back in the Great Recession with middling results. Gold got as high as $1,921 in 2011 before falling back to earth when the expected surge in inflation failed to materialize, putting a dent in his hedge fund’s performance.

Perhaps he fears the same thing will happen in 2020.

Another billionaire that isn’t afraid of gold is Bridgewater Associates’ Ray Dalio. His hedge fund owns more than $600 million of GLD, making the ETF his second-largest position.

25 Stocks That Billionaires Are Selling | Slide 21 of 26

SPDR S&P 500 ETF Trust

Colorful Pie Chart Consists of Paper Pages on Deep Grey Background.

MARKET VALUE: $273.9 billion

BILLIONAIRE INVESTOR: Ray Dalio (Bridgewater Associates)

SHARES SOLD: 3,425,622 (-49%)

Speaking of Dalio, he took a massive chunk out of his largest holding during Q1. His Bridgewater Associates sold nearly half of its holdings in the SPDR S&P 500 ETF Trust (SPY, $304.21) – an ETF that tracks the S&P 500 Index.

Even after those sales, the S&P 500 tracker remained Bridgewater’s largest holding at 18.2% of the fund.

Bridgewater sold out of several other ETFs in Q1. It dropped 43% of its holdings in the Vanguard FTSE Emerging Markets ETF (VWO, $39.38), which remains its second-largest holding at 9.2% of assets. Dalio also cast off 41% of his stake in the iShares Core S&P 500 ETF (IVV), another S&P 500 tracker that still is his fourth-largest holding at 6.6% of assets.

These three low-cost funds account for more than a third of Bridgewater’s portfolio. The rest is spread among 647 stocks and funds.

WhaleWisdom data shows that 919 financial institutions reduced their holdings in SPY during the first quarter, including 133 hedge funds. Moreover, 186 financial institutions closed out their positions entirely; 57 of those were hedge funds.

25 Stocks That Billionaires Are Selling | Slide 22 of 26

United Airlines


MARKET VALUE: $11.5 billion

BILLIONAIRE INVESTOR: Leon Cooperman (Omega Advisors)

SHARES SOLD: 1,160,802 (-100%)

Leon Cooperman exited United Airlines (UAL, $39.66) during the first quarter, months before Warren Buffett decided to do the same.

Cooperman had held United since the fourth quarter of 2013 and is estimated to have paid an average of $53.10 per share. in the first quarter, long before Warren Buffett decided to exit his airline stocks. If so, Omega Advisors lost a significant amount from its investment.

Cooperman’s hedge fund is said to manage $4.3 billion for clients. According to its 13F from December, UAL was the fourth-largest holding out of 60 stocks; only the hedge fund’s investments in Fiserv (FISV), Alphabet (GOOGL) and Cigna (CI) were larger.

Cooperman is said to be worth $3.2 billion, according to Forbes. That number likely would be higher if it weren’t for United.

25 Stocks That Billionaires Are Selling | Slide 23 of 26

VF Corp.


MARKET VALUE: $23.8 billion

BILLIONAIRE INVESTOR: Winslow Capital Management

SHARES SOLD: 3,587,053

Minneapolis-based investment manager Winslow Capital Management manages almost $19 billion for its clients. And during the first quarter, it exited a number of stakes, including in VF Corp. (VFC, $61.25), the apparel conglomerate best known for its Vans, The North Face and Timberland brands.

Winslow hadn’t owned VFC for very long. It picked up VF Corp.’s stock during the second quarter of 2019, paying an average of $90.61 per share. VFC has traded below that ever since its fiscal Q3 earnings report in late January. The company cut its full-year forecast thanks to declining demand for its Timberland brand and slowing growth at Vans.

Of note to long-time shareholders: In December 2018, John E. Barbey Jr. – the son of the company’s founder – died at the age of 102. In February 2019, trustees for Barbey’s will reported that Barbey’s various trusts owned 68.4 million shares of VFC stock at the end of 2018, representing 17.24% of its stock. On Feb. 7, 2020, the trusts reported that the shares shares owned had dropped to 39.7 million, representing 9.96% of VF Corp.’s stock.

Before too long, that stake might disappear from history.

25 Stocks That Billionaires Are Selling | Slide 24 of 26

Virgin Galactic

NEW YORK, NY РOCTOBER 28:  Sir Richard Branson, Founder of Virgin Galactic, arrives on the floor of the New York Stock Exchange (NYSE) before ringing a ceremonial bell to promote the first day of trading of Virgin Galactic Holdings shares on October 28, 2019 in New York City. Virgin Galactic Holdings became the first space-tourism company to go public as it began trading on Monday with a market value of about $1 billion. (Photo by Drew Angerer/Getty Images)

MARKET VALUE: $3.2 billion

BILLIONAIRE INVESTOR: Richard Branson (Vieco 10)

SHARES SOLD: 34,925,000 (-31%)

On May 14, Vieco 10, a subsidiary of Richard Branson’s Virgin Group, reported that it owned more than 112 million shares of Virgin Galactic (SPCE, $14.99), the Branson-founded commercial space travel company.

The billionaire has pursued this dream for years. It officially got underway in September 2004, when Virgin Galactic Airways was launched to much fanfare, and it went public in October 2019. Originally, Virgin Galactic’s management expected commercial spaceflight operations to begin in June 2020, but that timeline has been pushed back by COVID-19.

In the meantime, many of Branson’s hospitality businesses, which include Virgin Atlantic Airlines, have been severely hurt by the pandemic, forcing Branson to sell SPCE stock to help his other businesses survive during these troubling times.

On May 22, Vieco 10 reported that it had sold 22.4 million shares of Virgin Galactic stock, lowering its ownership stake from 53.3% to 42.7%. Then in June, it was reported that Branson was to sell up to 12.5 million shares through Credit Suisse at $15.30 per share. A June 5 regulatory filing showed that Vieco 10 was down to 77,290,438 shares, implying a stake of 36.7%.

Branson had said that he would sell $500 million in stock. The recent sales have hit that target, so we’ll see if any more take place in the future.

Despite these recent moves, Branson still is by far the largest owner of Virgin Galactic’s stock.

25 Stocks That Billionaires Are Selling | Slide 25 of 26

Walt Disney

ATLANTA, GA – APRIL 26: A general view of Marvel Studios’ Avengers: Infinity War Screening at The Fox Theatre on April 26, 2018 in Atlanta, Georgia. (Photo by Paras Griffin/Getty Images for Avengers: Infinity War)

MARKET VALUE: $208.6 billion

BILLIONAIRE INVESTOR: Larry Robbins (Glenview Capital Management)

SHARES SOLD: 2,088,178 (-100%)

The house that Walt built wasn’t one of Glenview Capital’s top 10 holdings starting out the year, but Walt Disney (DIS, $115.49) nonetheless represented a healthy 2.6% chunk of the fund’s assets. That was before Glenview opted to exit the stake, likely after seeing how devastating COVID-19 would be on Disney’s operations.

Of all the investment firms that sold 100% of their Disney holdings in the first quarter, Glenview sold the second-largest number of shares. It trailed only Oslo-based Norges Bank, which unloaded 17.7 million shares.

Robbins, who is worth almost $2 billion, tends to swing wildly between sprinting past the stock market and eating its dust. Through the first three months of 2020, Glenview is down 30.5%, which includes a 19.5% decline in March alone. It likely recovered some of those losses in April and May.

In 2019, however, Glenview delivered a 26.3% return that dwarfed the hedge fund community.

On June 4, Miller Tabak chief market strategist Mark Maley suggested that if Disney’s share price falls to $100, investors should back up the truck. If it gets to $100, you would think Robbins would consider renewing a position in the entertainment giant.

25 Stocks That Billionaires Are Selling | Slide 26 of 26

Wells Fargo

August 10, 2019 San Francisco / CA / USA – Wells Fargo branch in SOMA district

MARKET VALUE: $114.7 billion

BILLIONAIRE INVESTOR: Gardner Russo & Gardner

SHARES SOLD: 11,143,204 (-88%)

Tom Russo’s firm manages almost $10 billion in assets for clients. And during the first quarter, Russo decided that those assets would be better spent elsewhere than Wells Fargo (WFC, $27.97), chopping 88% of Gardner Russo’s stake.

Gardner Russo’s exit represented only the fourth-largest sale of WFC shares during the quarter. Interestingly, the No. 1 spot again goes to Norges Bank, which sold more than 40 million shares.

Wells Fargo easily was its biggest offloading of the first quarter. WFC went from being 5.2% of the portfolio to just 0.4%. Gardner Russo also exited 83% of its stake in Altria (MO), but that position represented less than 1% of assets at the end of 2019.

On June 2, news surfaced that Wells Fargo, one of the largest lenders for auto loans in the U.S., will stop making loans to independent auto dealerships. That’s an about-face from its earlier growth in the space; the bank grew its auto loans by 19% in the first quarter, to $6.5 billion.

Wells Fargo had “an obligation to review our business practices in light of the economic uncertainty presented by COVID-19 and have let the majority of our independent dealer customers know that we will suspend accepting applications from them,” Natalie Brown, a spokeswoman, said in an email to CNBC.

WFC shares are having a miserable year, off 48% year-to-date – more than double the financial sector’s losses in 2020.

Author: Will Ashworth

Source: Kiplinger: 25 Stocks That Billionaires Are Selling

The last time value stocks were in style, Abraham Lincoln still had a Pennsylvania Avenue address.

OK, it hasn’t been quite that long. Still, for years, even the best value stocks have taken a back seat to growth. The Wilshire US Large-Cap Growth Index, for instance, has produced a total return (price plus dividends) of 250.6% between the start of 2007 and May 11, 2020; over the same period, the Wilshire US Large-Cap Value Index managed just 106.7%.

Growth stocks appear to have gotten way ahead of themselves, which at least sets up the possibility that value stocks will return to favor. But there are no guarantees.

“Growth’s outperformance will end when it finally crumbles under its own weight, as it finally did in 2000, but I have no idea if it happens next week or in five years,” Pekin Hardy Strauss portfolio manager Josh Strauss recently told MarketWatch.

Market timing is a fool’s errand, however. Instead, you can do well by simply targeting high-quality value stocks now … which includes determining just what real “value” is. For instance, is a stock that trades at less than five times earnings a bargain if it’s buried in debt? That seems doubtful, especially in this uncharted economic territory brought about by COVID-19.

Here are 10 of the best value stocks to buy right now. For the value component, we’re using cash rather than profits, which can be skewed by various accounting adjustments. Also, in this time of uncertainty, it’s important for portfolio picks to have healthy balance sheets. So each of these stocks boasts cash positions that are greater than their outstanding debt.

10 Best Value Stocks for Gritting Out the Downturn | Slide 2 of 11

SVB Financial

MARKET VALUE: $8.9 billion

NET CASH: $5.8 billion

PRICE-TO-CASH FLOW: 9.1

Bank stocks aren’t having much luck during the pandemic, and their shareholders know it. Year-to-date, the SPDR S&P Bank ETF (KBE) has plunged 43%, dipping harder than the S&P 500 into the bear market and coming off the mat much more slowly.

Out in Silicon Valley, tech- and startup-focused SVB Financial (SIVB, $173.28) reported disappointing first-quarter results on April 23. Profits fell 53% to $2.55 per share, widely missing analysts’ expectations for $3.07. On the plus side, it was the first negative earnings surprise in the past four quarters.

Nonetheless, SIVB could be one of the best value stocks in the industry right now.

SVB Financial’s shares are off 31% year-to-date. But despite that considerable decline in net income, the bank’s net interest margin was 3.12% – only 14 basis points lower than in Q4 2019. By comparison, Wells Fargo’s (WFC) net interest margin in the first quarter was 2.58%.

In the company’s Q1 2020 letter to stakeholders, CEO Greg Becker highlighted the ways in which the bank is prepared for whatever COVID-19 brings.

“In good markets and bad, we have maintained the strong underwriting standards that have made us so successful over time. In past cycles, we have seen elevated early-stage losses as well as episodic losses in other parts of the portfolio. These have been followed by a rapid return to more normal credit patterns,” Becker said. “Our loan portfolio is stronger and more diversified today than in the last crisis.”

Meanwhile, SIVB’s price-to-cash flow of 9.1 is lower than it has been for most of the past decade.

10 Best Value Stocks for Gritting Out the Downturn | Slide 3 of 11

Medpace Holdings

MARKET VALUE: $2.9 billion

NET CASH: $80.0 million

P/CF: 14.3

When you want to develop a new drug or medical device, Medpace Holdings (MEDP, $81.83) provides full-service clinical trial outsourcing, from early Phase 1 clinical trials through pre-FDA approval Phase 3 clinical trials.

Like infrastructure contractors, you can evaluate Medpace’s business by its net book-to-bill ratio over a quarterly and trailing-12-month basis. In the first quarter of 2020, Medpace’s net new business awards were $246.9 million, or 1.07 times its revenue for the quarter. In the trailing 12 months, its book-to-bill ratio was 1.23, down slightly from 1.28 a year earlier.

During the pandemic, we’ve all seen how important companies like Medpace are to the healthcare system. Medpace finished the first quarter with a backlog of $1.29 billion, which was 16.8% higher than the year-ago period. Also, MEDP earned $29.0 million during Q1, 50.8% better year-over-year.

Medpace caters to smaller biopharmaceutical companies, which account for 75% of its business, followed by mid-sized biopharmaceutical firms at 16% and large ones at 9%. When investors think of smaller biopharmaceutical companies, they generally think of money-losing operations. Nonetheless, MEDP is profitable, and in Q1 2020, it converted more than 100% of its quarterly income to free cash flow.

Medpace went public in August 2016 at $23 per share and has shot up 256% since then. Yet it still boasts a free cash flow yield of 7.2%; FCF yields of 8% or higher are generally considered value territory. If you’re uncomfortable classifying MEDP with other value stocks, consider it growth at a very reasonable price.

10 Best Value Stocks for Gritting Out the Downturn | Slide 4 of 11

Facebook

MARKET VALUE: $589.2 billion

NET CASH: $50.0 billion

P/CF: 15.7

It might seem odd to have Facebook (FB, $206.81) on any list of value stocks. But while Facebook’s P/CF is indeed shrug-worthy, what that buys you – a financial fortress – is why it’s still a value.

Facebook had $60.3 billion in cash on its balance sheet and $10.3 billion in debt at the end of its first quarter. That works out to $21.02 per share in cash, or a little more than one-tenth its share price. By comparison, Pinterest (PINS) had more as a percentage of its share price ($3.02 per share, so 17%), but Facebook also has generated $23.1 billion in free cash flow over the past 12 months, while Pinterest hasn’t generated any.

Everything’s relative.

Facebook’s business was indeed affected by the coronavirus outbreak, but it still managed to deliver first-quarter results that were stronger than most. Earnings roughly doubled year-over-year to $4.9 billion, and monthly average users (MAUs) jumped 10% to 2.6 billion – 50 million higher than analyst expectations. Facebook is understandably cautious about the second quarter.

“Outlook is really uncertain. We have a really cautious outlook on how things are going to develop,” Facebook CFO David Wehner told CNBC. “We have seen signs of stability reflected in the first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago.”

Nonetheless, FB stock should be in fine shape. Facebook is the dominant game in town, and many analysts anticipate the coronavirus outbreak will merely accelerate the ongoing trend of advertising dollars shifting to digital.

10 Best Value Stocks for Gritting Out the Downturn | Slide 5 of 11

Arista Networks

MARKET VALUE: $15.6 billion

NET CASH: $2.6 billion

P/CF: 16.8

Arista Networks (ANET, $205.59) develops cloud networking solutions such as routers and switches for high-performance data centers, cloud service providers and large-scale internet companies.

The company is looking to grab a significant piece of the cloud networking market, which is estimated to be $30 billion by 2024, by using its Extensible Operating System (EOS) to provide a programmable, highly modular, cloud networking platform.

Arista Networks exemplifies the benefits of gender diversity in corporate leadership. Jayshree Ullal has been chief executive since October 2008, long before the company’s June 2014 initial public offering. And since pricing at $43 per share, Arista’s shareholders have enjoyed a 378% return – very good news for Ullal, who owns 3.7 million shares worth $752 million.

Over the past five years, Arista’s revenues have grown 186%, from $837.6 million in 2014 to $2.4 billion in 2019. Operating profits have exploded by 440% over the same period to $805.8 million.

Arista’s first-quarter results were better than expected. Revenues of $523 million were $10 million higher than consensus estimates, while adjusted earnings of $2.02 per share beat the Street by 23 cents. Both figures were lower year-over-year, however, and Arista’s Q2 revenue estimates were shy of the analyst mark.

However, Arista remains 1% higher year-to-date versus a 12% decline for the S&P 500. While ANET’s operations clearly aren’t invulnerable to COVID-19, it’s still a logical play on the long-term growth of cloud computing. And while it’s not quite as cheap as it was in mid-March, it’s still trading at a P/CF that’s half its five-year average. At current prices, Arista is an intriguing value buy.

10 Best Value Stocks for Gritting Out the Downturn | Slide 6 of 11

Interactive Brokers

MARKET VALUE: $15.7 billion

NET CASH: $3.1 billion

P/CF: 2.2

Interactive Brokers (IBKR, $37.68) was founded in 1978 by Thomas Peterffy, the company’s current chairman and Florida’s wealthiest resident in 2019. The company currently executes more than 1.4 million trades per day around the world.

If you believe company founders are generally better stewards of capital, you might like IBKR, given that Peterffy controls 81% of the company’s votes. But the company has had a rocky time of late. As of this time two years ago, IBKR had wildly outperformed the S&P 500 on a total-return basis, 711% to 390%; however, shares have been halved since then, thanks to aggressive competition, lower interest rates and Peterffy’s relinquishing of the CEO position.

But things might be perking up for Interactive Brokers. In the first quarter ended March 31, its adjusted net revenues and adjusted income before taxes increased by 24.1% and 22.7%, respectively. IBKR also boasted a healthy 10% sequential increase in total accounts to 760,000, and a 4% increase in net revenue per average account to $3,069.

On a pure P/CF basis, Interactive Brokers is one of the best value stocks you can buy, with a 2.2 multiple that’s fathoms below its five-year average of 33.9.

10 Best Value Stocks for Gritting Out the Downturn | Slide 7 of 11

Take-Two Interactive

MARKET VALUE: $14.9 billion

NET CASH: $1.8 billion

P/CF: 16.9

Video game companies such as Take-Two Interactive (TTWO, $131.53) have been among the most popular “social distancing stocks.”

“People are at home, they have nothing to do, they are not commuting,” Michael Pachter, an analyst at Wedbush Securities, told the Washington Post. “You have more time and you’re bored.”

In February, when the company announced earnings for its fiscal third quarter ended December, CEO Strauss Zelnick suggested that Take-Two’s future game releases are as strong as they’ve ever been.

“Take-Two’s development pipeline over the coming years is the largest and most diverse in our history,” Zelnick said. “Take-Two is exceedingly well positioned to capitalize on the many positive trends in our industry and to generate growth and margin expansion over the long-term.”

TTWO finished the third quarter with net cash of $1.8 billion. It expects to release a number of video game titles in fiscal 2021 that will be available on several platforms.

The company isn’t just benefiting from people playing more video games – but from an increased interest in watching them, too. ESPN recently announced that it would be airing live NBA 2K League matches in May on ESPN2, the ESPN app and at ESPN.com. NBA 2K is one of Take-Two’s most popular video game franchises, and this will mark the NBA-operated league’s first live-TV airings in the U.S.

One problem that could slow 2020’s surge in gaming is if Microsoft (MSFT) and Sony (SNE) face delays in getting their next-generation gaming consoles launched in time for the holiday season.

Nonetheless, Wall Street is plenty optimistic about the company’s prospects. Of the 29 analysts covering TTWO stock, 20 view it as a Strong Buy or Buy, while the rest are merely on the sidelines at Hold. Its P/CF is nothing to scream about, but when you factor in Take-Two’s potential, it looks much more like a value.

10 Best Value Stocks for Gritting Out the Downturn | Slide 8 of 11

ITT

MARKET VALUE: $4.1 billion

NET CASH: $360.0 million

P/CF: 11.4

The original ITT (ITT, $47.38) was called International Telephone & Telegraph. It got its start in 1920 and ultimately became a provider of telephone switching equipment and telecom services. In the 1960s, it went on an acquisition binge, buying more than 350 companies, including Sheraton Hotels, Avis Rent-a-Car, Hartford Insurance and many others. In 17 years, it grew sales from $760 million to $17 billion.

Fast forward to 2011, when ITT split itself into three businesses: Xylem (XYL) a water business, which remains public to this day; Excelis, a defense contractor that, through M&A, is now part of L3 Harris Technologies (LHX); and ITT Corporation, an industrial company manufacturing motion and flow control products. ITT Corporation reorganized as the current ITT Inc. in 2016, separating its operating assets from its liabilities and insurance assets.

Today, ITT has three operating segments: Industrial Processes, Motion Technologies, and Connect and Control Technologies.

ITT’s revenues fell by 4.6% to $663.3 million during the first quarter, and profits declined by 12.1% to 80 cents per share. Nonetheless, both results exceeded analyst expectations. Meanwhile, free cash flow in the trailing 12 months increased by 3.3% to $284.7 million; free cash flow margins narrowly improved by 1 basis point to 10.1%.

ITT is one of the most battered value stocks on this list, at 35.6% losses year-to-date. But four of the five analysts who have sounded off on shares over the past month call the stock a Buy, with a $61.40 average price target that implies nearly 30% upside. Meanwhile, its P/CF ratio of 11.2 hasn’t been this low since 2012, and its free cash flow yield of 7.7% is on the verge of value territory.

10 Best Value Stocks for Gritting Out the Downturn | Slide 9 of 11

National Beverage

MARKET VALUE: $2.3 billion

NET CASH: $210.0 million

P/CF: 14.8

If you’ve been following the LaCroix sparkling water story, you’re probably aware the fizz has gone out of National Beverage’s (FIZZ, $49.72) stock in recent years. If you invested five years ago, you have an annual return of 20.6%. If you invested three years ago, that turns into a roughly 14% annual loss.

The cause of the stock’s retreat was a combination of increased competition in the sparkling water market from brands such as PepsiCo’s (PEP) Bubly as well as a number of public relations nightmares regarding CEO Nick Caporella, who founded National Beverage in 1985.

But sometimes, buying a beaten-down stock during tumultuous times can result in outsized, long-term gains.

National Beverage reported better-than-expected third-quarter results in early March. Sales grew 1% year-over-year to $222.8 million, its first quarter with positive growth in quite awhile. Interestingly, its Shasta and Faygo carbonated soft drink brands had volume growth of 3.2%, more than double the growth from its Power+ brands, which includes LaCroix. Earnings, meanwhile, improved by 7.1% to $26.6 million; on a per-share basis, profits of 57 cents beat the Street by 7 cents per share.

The company’s 14.8 P/CF is its lowest multiple since 2010, warranting it space on this list of the market’s best value stocks.

10 Best Value Stocks for Gritting Out the Downturn | Slide 10 of 11

SEI Investments

MARKET VALUE: $7.5 billion

NET CASH: $730.0 million

P/CF: 13.3

If you work in the investment management business, you’re likely familiar with SEI Investments (SEIC, $50.64). SEI provides front-, middle- and back-office support to more than 11,300 banks, trust institutions, wealth management organizations, independent investment advisers and other financial organizations. And it has been doing so since 1968.

SEI manages or administers more than $920 billion in hedge funds, private equity, mutual funds, and pooled or separately managed assets. It hasn’t done particularly well in 2020, off almost 23% year-to-date. Nor has it done particularly well over the past decade. Its annualized 10-year total return is 9.6%, 210 basis points less than the Morningstar US Market Index over the same period. (A basis point is one one-hundredth of a percentage point.)

The company understandably struggled in the first quarter. The market’s sharp correction sent assets under management 14.6% lower year-over-year to $283.4 billion. Assets under management, administration and advisement fell by 2.6%. That resulted in revenues of $414.8 million and profits of 72 cents per share – both below analyst estimates.

So, why buy SEI?

SEIC shares are cheaper by almost every valuation metric, including price-to-cash flow, than it has been over the past five years. Further, it has a very high return on invested capital of 28%. It’s also flush with cash and has a sound balance sheet that should get it through this downturn. If it recovers like analysts expect it to in 2021, shares should follow suit.

10 Best Value Stocks for Gritting Out the Downturn | Slide 11 of 11

UniFirst

Multi-ehnic workers in service garage at trucking company.

MARKET VALUE: $2.9 billion

NET CASH: $350.0 million

P/CF: 10.3

Five years ago, if you invested in UniFirst (UNF, $156.04), one of North America’s largest providers and servicers of work uniforms, you would have generated an annualized total return of 5.9% for yourself, 180 basis points less than the Morningstar US Market Index. You also would have severely underperformed Cintas (CTAS), UniFirst’s much bigger competitor.

Value investing often means swimming upstream, going against the crowd. Given its longer-term underperformance and a 22.6% decline year-to-date, UniFirst could hardly be confused with a growth stock. And that’s all right.

In the first quarter of 2020, UniFirst’s revenue improved 6.2% year-over-year to $464.6 million, while net income jumped 8.2% to $34.7 million. All three operating segments grew their sales during the quarter, including core laundry operations, which account for 89% of overall sales.

CEO Steven Sintros has been blunt, saying the pandemic is likely to hurt its sales and earnings for the remainder of the year. Further, if oil prices stay low and the Canadian dollar continues to weaken, the downside could be even worse than projected.

That said, Unifirst boasts a solid balance sheet with $395 million in cash at the end of March, no long-term debt and just $45 million in operating lease liabilities. And analysts expect profits to rebound in the mid-teens next year. So UNF, which trades at just more than 10 times cash flow, might fly under most investors’ radar, but it’s worthy of consideration if you’re delving into value stocks.

Author: Will Ashworth

Source: Kiplinger: 10 Best Value Stocks for Gritting Out the Downturn

Retailers across the country are working diligently to ensure that their businesses aren’t the next victim of the coronavirus. The e-commerce revolution might have brought the industry to its knees, but it seems like COVID-19 is ready to deal the final blow – bankruptcy – to several retail stocks.

On April 24, reports surfaced that Neiman Marcus could be filing for Chapter 11 bankruptcy at any moment. The department store, which reportedly was in talks with lenders to obtain $600 million in emergency funding to ensure it gets through bankruptcy proceeds, was suffering under $4 billion in debt long before the coronavirus exerted its pressure on the industry.

However, not everyone is keen on the department store to file. Mudrick Capital Management LP has gone so far as providing Neiman Marcus with a proposal to supply $700 million in debtor-in-possession financing. However, its funding comes with a stipulation that Neiman Marcus must find a buyer. That’s no easy task, given that all 43 of its stores have been closed since March 17, and the retailer has had to furlough more than 14,000 employees. Few buyers want to take on that kind of responsibility.

Neiman Marcus is hardly alone in its struggles.

Here, we look at 10 retail stocks that find themselves in considerable peril thanks to the coronavirus’ toll on the industry. In some cases, the companies have already been linked to potential bankruptcy filings. In others, credit ratings agencies have reported serious concerns about these companies’ debt. And in still others, their financial positions are signaling danger via an ominous “Altman Z-score,” a metric measuring a company’s credit strength to determine the likelihood of bankruptcy. (More on how that works in a minute.)

None of this is a guarantee that any of these companies will indeed go bankrupt – lesser companies have been saved from worse, whether it’s on their own merits or through plans like the one proposed by Mudrick Capital. However, each of these retail stocks is extremely distressed thanks to the COVID-19 threat and face a heightened risk of bankruptcy or other drastic measures as a result. For that reason, investors should keep their distance.

Data is as of April 27. Altman Z-scores provided by Gurufocus.com.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 2 of 11

Ascena Retail

MARKET VALUE: $13.4 million

ALTMAN Z-SCORE: 0.58

Ascena Retail (ASNA, $1.50) – the owners of Ann Taylor, LOFT, Lane Bryant, Justice and other retail brands – operates roughly 2,800 stores in the U.S. and Canada.

The once highflying retail conglomerate isn’t new to the topic of bankruptcy. In August 2019, reports began to circulate that Ascena’s lenders were getting nervous about its outstanding debt, which at the time stood at more than $1.4 billion. ASNA also was said to be meeting with bankruptcy law firms.

Ascena had been battling with landlords over its Dressbarn banner and more than $302 million rent payments. At one point, Fox Business reported, Ascena insinuated it would file for Chapter 11 bankruptcy to skip out on the debt. In February 2020, Ascena completed its wind-down of Dressbarn, resulting in the closure of more than 650 stores and the elimination of the debt.

S&P Global Ratings lowered its debt rating on Ascena from CCC to “selective default” on March 12. They did so after Ascena repurchased $122 million of its 2022 term loan facility below par – a move the ratings’ agency considered distressed. On March 16, they raised their rating to CCC-, arguing that the risk of conventional default (which could benefit bondholders by comparison) has increased due to the coronavirus and its high level of debt.

Still, ASNA is hardly in a position of strength. “The negative outlook reflects our view that the company will likely pursue a restructuring in the next six months amid weak operating performance and industry challenges,” S&P Global Ratings writes.

Then there’s Ascena’s low Altman Z-score of 0.58. Altman Z-score is intended to assess a company’s financial stability. It takes several financial numbers from a balance sheet and income statement and turns them into a score. Anything above 2.99 means a company is unlikely to face bankruptcy within the next 24 months. Anything below 1.81 means a company is in distress and could go bankrupt within 24 months. And everything in between is a gray zone, albeit one signaling the possibility of financial distress.

Ascena did respond to the original downgrade on March 12, saying it wasn’t considering bankruptcy and that it was in full compliance with regard to all of its obligations. Further, ASNA believes it has sufficient liquidity with $600 million in cash and what’s available on its revolving credit facility.

Still, this is a company that suffered a $125.8 million operating loss through the first six months of its fiscal year – a period that ended Feb. 1, 2020. And things have almost certainly taken a turn for the worse since then.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 3 of 11

JCPenney

MARKET VALUE: $80.7 million

ALTMAN Z-SCORE: 0.89

A bankruptcy filing by JCPenney (JCP, $0.27), if recent reports are accurate, could be just days from happening.

On April 24, a Wall Street Journal report claimed the retailer is negotiating with its current lenders for a debtor-in-possession loan that would allow it to continue to operate during potential bankruptcy proceedings. The amount of the loan could be up to $1 billion.

JCPenney finished its fiscal year ended January with net debt of $3.33 billion, down considerably from its 2015 net debt of $3.87 billion. However, in that same time, revenues have fallen by 15% to $10.7 billion. It also has lost money on a non-GAAP (generally accepted accounting principles) basis in three of the past four years.

On April 15, JCPenney failed to pay $12 million in interest on its 6.375% senior notes due in 2036. Its lenders gave it a 15-day extension to make the payment. If the company fails to come through, the lenders can force repayment of the $388 million in notes, 16 years before they come due.

Analysts were concerned about JCPenney prior to the coronavirus. Now that unemployment is expected to be higher than normal for months, if not years, it is going to be very difficult for the department store to refinance its debt at reasonable interest rates.

“There’s a good chance they can survive, but this is no layup,” Customer Growth Partners’ Craig Johnson recently told CNN. “This is going to be a three-pointer deep in the corner with time running out.”

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 4 of 11

L Brands

MARKET VALUE: $3.2 billion

ALTMAN Z-SCORE: 1.30

L Brands (LB, $12.21) is a tale of two businesses. You’ve got the struggling Victoria’s Secret brand, which can’t seem to do anything right these days. And you’ve got Bath & Body Works, which can’t seem to do anything wrong.

Investors thought the company solved its problems in February by selling 55% of its lingerie business to Sycamore Partners, a private equity firm that also owns Talbots and several other retailers. L Brands received $525 million for giving up majority control. It also would retain 45% of what would become a privately held company under Sycamore management.

Not so fast.

On April 22, L Brands announced that Sycamore sent a notice to the company expressing that it intended to terminate its agreement to buy 55% of Victoria’s Secret. It went as far as asking the Chancery Court of Delaware to render the agreement null and void because L Brands closed stores and laid off employees, violating the agreement.

L Brands filed a lawsuit of its own on April 23, arguing that Sycamore’s move was nothing more than “buyer’s remorse” and an invalid reason for terminating the agreement. L Brands further argues that in recent weeks, Sycamore had tried to lower the acquisition price.

Several analysts believe the store closures by L Brands were necessary and within the company’s rights amid the COVID-19 pandemic. However, Alon Kapen, a lawyer with Farrell Fritz, a Long Island law firm, suggested to Retail Dive that LB had an obligation to speak with Sycamore about these closures.

The outcome could determine the future financial health of L Brands. Although it has a market capitalization of more than $3 billion, it currently has a Z-Score of 1.30, putting it well within distressed territory.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 5 of 11

Rite Aid

MARKET VALUE: $828.3 million

ALTMAN Z-SCORE: 1.77

Rite Aid (RAD, $15.65) finished fiscal 2020 (ended Feb. 29) with revenues of $21.9 billion, which was 1.3% higher than a year earlier. The bottom line was even more improved, with a net loss from continuing operations of $469.2 million – 30% thinner than the year-ago loss. On an adjusted basis, Rite Aid made $8 million from its continuing operations in 2020, flipping from a loss of $3.1 million a year ago once certain one-time items were backed out.

Also fortunate for shareholders: Rite Aid’s 2,400-plus pharmacies remain open during the coronavirus, ensuring the sales keep rolling in. The company’s revenue outlook for fiscal 2021 is expected to be between $22.5 billion and $22.9 billion, with Retail Pharmacy same-store sales growth of 1.5% to 2.5%.

Rite Aid expects to generate adjusted earnings in 2020 of anywhere from a loss of 22 cents to a profit of 19 cents. However, if social distancing continues for an extended period, it could result in significantly lower front-end sales and prescriptions. That would be terrible news for CEO Heyward Donigan, who was brought in by the board in August 2019 to take the company in a different direction.

Donigan’s turnaround plan focuses on becoming the dominant mid-market pharmacy benefits manager (PBM), leveraging its more than 6,400 pharmacists to provide customers with whole-health and wellness solutions, and revitalizing Rite Aid’s retail and digital experience.

Rite Aid’s biggest problem right now is how much time it has to execute on these plans. As of the end of February, RAD had $3.1 billion in long-term debt at an average interest rate of 5.7%. In 2020, it paid out $229.7 million in interest on its debt. That debt load makes it virtually impossible for Rite Aid to make money on a GAAP basis. Several analysts include RAD among their stocks to sell as a result.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 6 of 11

Capri Holdings

MARKET VALUE: $2.1 billion

ALTMAN Z-SCORE: 1.80

On April 1, Fitch Ratings downgraded Capri Holdings’ (CPRI, $14.74) debt from BBB- to BB+, moving it from investment-grade to junk-bond status. Fitch also said its outlook for Capri is negative.

It seems the owner of higher-end brands such as Michael Kors, Versace and Jimmy Choo is suffering from the coronavirus like most other retailers.

In early February, Capri cut its annual revenue outlook from $5.8 billion to $5.65 billion. Since then, North American retail has struggled as stay-at-home orders filtered through the U.S. and Canada.

Fitch projects a global slowdown in consumer discretionary spending could extend into 2021. As a result, it projects that Capri’s revenues could fall by 25% in 2021 to $4.5 billion and another 10% in 2022. The ratings agency does believe Capri has enough liquidity to get it through the coronavirus and decline in consumer discretionary spending.

Capri provided investors with a COVID-19 update on April 6. The retailer said it had $900 million in cash and cash equivalents on its balance sheet as of April 1, and that it had completely drawn down the remaining $300 million of its $1 billion revolving credit facility.

Capri, which expects its stores in North America and Europe to be closed until June 1, has moved to drastically cut expenses. It has reduced director pay; CEO John Idol will forgo his salary for fiscal 2021, which ends March 31. On April 11, Capri furloughed all 7,000 of its retail store employees. CPRI also is reducing its capital expenditures and inventory purchases for the year.

For now, Capri isn’t an immediate-term bankruptcy threat. Fitch believes Capri can weather the storm, and indeed it might based on current assumptions. However, if a lack of consumer discretionary spending carries well into 2021, that outlook could change.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 7 of 11

Gap


MARKET VALUE: $2.9 billion

ALTMAN Z-SCORE: 1.96

Gap’s (GPS, $8.26) Z-score has yet to fall below the pivotal 1.81 level that would an indicate an imminent bankruptcy. However, the April 23 COVID-19 update it filed with the SEC was hardly reassuring.

Not only did Gap say that its cash and expected cash “may not be sufficient to fund our operations,” but the company also reported it had burned through roughly $1 billion in cash since the beginning of February.

The same day, Gap announced the pricing of $2.25 billion in senior secured notes that pay investors between 8.375% and 8.875% and mature between 2023 and 2027. The company will use the proceeds from the sale of junk bonds to refinance notes due in 2021; those notes had a much more reasonable 5.95% interest rate attached.

Gap also said that starting in April, it was suspending monthly rent payments worth $115 million for its stores in North America. It currently is negotiating with landlords to get deferments and reductions in its rent during the coronavirus. It also wants to renegotiate future rents downward or terminate leases where a financial arrangement isn’t possible.

The Gap expects to finish the end of its fiscal quarter on May 2 with as little as $750 million in cash despite furloughing approximately 80,000 employees, cutting orders for summer and fall, and drawing down its entire $500 million revolving credit facility at the end of March.

Considering Gap’s overall sales were deteriorating before the coronavirus shut non-essential businesses, it’s possible that the company’s financial condition could result in further drastic measures later in 2020.

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Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 8 of 11

GNC Holdings

MARKET VALUE: $62.6 million

ALTMAN Z-SCORE: 2.00

GNC Holdings (GNC, $0.67) has gone through considerable turmoil in recent years. The coronavirus isn’t making things any easier.

In mid-2019, GNC announced that it planned on closing 700 to 900 stores by the end of 2020. Most of the store closures will be mall locations that have suffered from reduced traffic in recent years. Approximately 28% of its retail footprint is in mall-based locations. GNC ended up closing 851 locations in 2019.

In March 2020, the company announced that it didn’t expect to generate enough cash from its operations to be able to pay off debt maturing in August 2020 and early in 2021. As a result, S&P Global Ratings lowered the company’s debt from CCC+ to CC, well into junk status.

“We believe conditions for GNC are deteriorating substantially due to the coronavirus pandemic, the anticipated macroeconomic downturn, and the limited access to capital markets,” S&P Global Ratings analyst Khaled Lahlo said in a press release.

GNC reported its fourth-quarter and fiscal 2019 results on March 24. Sales fell 12% to $2.1 billion, while adjusted income for the year increased by 38%, to $40.0 million. One of the few bright points was GNC’s e-commerce business, which accounted for 8.8% of its overall sales – 90 basis points higher than in 2018. (A basis point is one one-hundredth of a percentage point.) In the fourth quarter, e-commerce revenues accounted for 11.5% of sales in the U.S. and Canada, 220 basis points higher than a year earlier. Overall, in terms of actual dollars, however, e-commerce sales actually fell 2.1% in 2019 to $182.0 million.

GNC shares have lost 73% of their value year-to-date. A continued downturn and a model still heavily reliant on brick-and-mortar sales could continue to wear on the health retailer.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 9 of 11

Macy’s

MARKET VALUE: $1.7 billion

ALTMAN Z-SCORE: 2.00

When Macy’s (M, $6.08) CEO Terry Lundgren stepped down at the end of March 2017, the retailer had just completed a fiscal year in which it generated $25.8 billion in sales and $1.3 billion in operating profits. That wasn’t anything near the company’s 2014 fiscal year ($2.8 billion in operating profits on $28.1 billion in sales), but it was still very positive.

Macy’s finished its most recent fiscal year with net sales of $24.6 billion and operating income of just $970 million. The decline is discouraging, but what’s really giving shareholders a hard time is speculation that the coronavirus could see Macy’s go broke.

On April 18, Cowen analysts estimated that Macy’s has only four months of cash left. On April 21, CNBC, citing people familiar with the matter, reported that the department store was looking to raise as much as $5 billion in debt to ward off bankruptcy as a result of COVID-19.

Should the crisis carry on into the fall, it’s quite possible that the department store would be forced to file for bankruptcy to ensure its stores could remain open. That could give Macy’s time to sell off real estate and possibly its Bluemercury luxury skin-care brand to pay down its growing level of debt.

Macy’s had $3.45 billion in net debt at the end of January. The addition of $5 billion in cash would give it more time. But if its business continues to deteriorate, Macy’s Z-score, which indicates whether it might go bankrupt in the next two years, surely would move much lower.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 10 of 11

Children’s Place

MARKET VALUE: $386.4 million

ALTMAN Z-SCORE: 2.08

Children’s specialty apparel retailer Children’s Place (PLCE, $29.08) looks like it’s in a wounded but at least survivable position with a Z-score of 2.08. Still, the risks here are noteworthy.

Children’s Place finished its fourth quarter and fiscal year ended Feb. 1 with $68 million in cash and no long-term debt. However, PLCE did have $122 million in current lease liabilities and $312 million in long-term lease liabilities. With the Gap suspending rent payments, it’s clear retailers of all sizes are having a problem meeting the monthly commitment.

In addition, Children’s Place has $171 million undrawn of its $350 million revolving credit facility. Plus, it plans to execute the accordion option on its revolver to access another $50 million in cash.

While $289 million might seem like a lot of cash to fight the economic downturn caused by the coronavirus, the company said approximately 65% of the retailer’s sales between February and April were expected to be in-store revenue. Of that, March and April normally account for the lion’s share of Q1 sales. Based on the assumption above, as well as PLCE’s $412 million in Q1 2019 revenue, it will be lucky to generate 60% of last year’s results.

Add in that many consumers either won’t want to venture out into physical retail spaces, while others won’t have the money because of job losses, at least in May and quite possibly June, and the company’s second quarter could be a lost cause as well.

Bankruptcy is a long shot here, but possible nonetheless. More to the point for investors, PLCE still faces additional downside risk should the economy’s “re-opening” produce less brisk results than hoped.

Bankruptcy Watch: 10 Retail Stocks at Growing Risk | Slide 11 of 11

GameStop

MARKET VALUE: $375.1 million

ALTMAN Z-SCORE: 2.45

Most retailers are busy fighting COVID-19. On that front, GameStop (GME, $5.67) is no different. However, it has the added issue of dealing with activist investor Hestia Capital, which owns 7.2% of the world’s largest video game retailer.

On April 27, Hestia Capital sent a letter to shareholders outlining some of the changes it would like to see the company enact as part of delivering value for shareholders. A big concern: Most of the directors come from traditional retail backgrounds and don’t have the tech savvy necessary for GameStop to be successful.

“The Board remains too retail-focused and continues to unsuccessfully apply traditional retail strategies to address the Company’s problems. These efforts have failed for the past 5+ years because the gaming industry has evolved to become more community-based and digitally oriented,” the letter to shareholders stated. “Trying to apply traditional retail strategies to compete with Amazon, Wal-Mart, Best Buy, and others is doomed to fail.”

One of the activist’s points in its letter to shareholders addresses the company’s long-term liquidity. Specifically, it has $420 million in 6.75% senior notes due in March 2021 – notes that Moody’s has well down the junk ladder at Caa2. In 2019, GameStop repurchased almost $54 million of these notes at prices between 99.6% and 101.5% of par value.

Hestia Capital believes that given the notes have been trading at 69 cents on the dollar, now is the time to pay down its debt.

GameStop recently issued a COVID-19 update saying it had $772 million in cash available to it as of April 4, which means it has net cash (so, factoring in debt) of approximately $352 million. It’s not an imminent threat to go bankrupt tomorrow.

However, given that one-third of GameStop’s stores in the U.S. remain closed and two-thirds available for curbside pickup only, it wouldn’t be prudent to pay down debt at this stage of the reopening process. And given that the company’s top and bottom lines have withered for years amid video gaming’s aggressive push to digital sales, bankruptcy still is a longer-term possibility if GameStop can’t figure out an effective turnaround plan.

Author: Will Ashworth

Source: Kiplinger: Bankruptcy Watch: 10 Retail Stocks at Growing Risk

Mid-cap stocks aren’t exactly spotlight hogs.

Many investors buy into large companies because they tends to be more stable, plus information and media coverage are more readily available. Investors also know to buy small-cap stocks if they want to make aggressive growth investments to boost their long-term returns. But mid-caps – typically, stocks between $2 billion and $10 billion in market value – tend to get lost in the mix.

That’s unfortunate, because over the long haul, they tend to outperform their larger and smaller brethren.

Between 2015 and 2019, the S&P 500 outperformed both the S&P MidCap 400 and the S&P SmallCap 600 on a total-return basis (price plus dividends). In the 10 years from 2010 and 2019, small caps flipped the script, outperforming the large- and mid-cap indices. But across the entire span, from 2005 to 2019, the MidCap 400 delivered a total return of 293% – 14 percentage points higher than the SmallCap 600, and 33 percentage points better than the S&P 500. Experts point out that outperformance looks even better once you adjust for risk.

“Large-cap stocks offer the stability that comes with mature multinational businesses with diverse revenue sources,” Matthew Bartolini, head of SPDR Americas Research, writes in a 2019 note to clients. “Small-cap stocks are unproven, but they offer potential for further expansion and market penetration. And midcaps offer a unique combination of the managerial maturity associated with large caps and the operational dexterity of small caps.”

With this in mind, here are 15 of the best mid-cap stocks to buy to give you upside growth potential in stronger economies, along with some downside protection when the market environment looks weaker.

Yeti Holdings

MARKET VALUE: $3.2 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 10 Strong Buy, 2 Buy, 2 Hold, 0 Sell, 0 Strong Sell

Yeti Holdings (YETI, $36.59) makes premium coolers, bottles and other outdoor products. It’s coming off a strong 2019 in which its stock gained a whopping 134%, and it appears ready to take its place among the best mid-cap stocks in 2020.

Yeti delivered better-than-expected third-quarter results at the end of October. Sales increased by 17% year-over-year to $229.1 million, and adjusted earnings popped 29% to $26.1 million, or 30 cents per share; both figures topped analyst expectations. For the full year, Yeti is expecting sales growth of at least 14.5% and earnings growth of 23% to 26%. Looking out to 2020, analysts predict revenues and profits will improve by 13% and 20%, respectively. All of these are promising figures.

In January, KeyBanc Capital Markets analyst Brett Andress conducted store checks at eight Lowe’s (LOW) locations in Florida to ascertain how well Yeti’s partnership with the home improvement retailer was doing. He wrote that Yeti’s products were receiving excellent product placement in high-traffic areas, and that each location was stocking approximately $36,000 in products. Andress suggests that if Yeti sold at all Lowe’s stores, the company could gain an additional $30 million in annual revenues and 10 cents per share in profits by 2021.

Another info trove – credit card data – indicates that Yeti’s online sales in the important month of December grew by more than 100% over 2018. That has Andress suggesting a 62% jump in revenues for Yeti’s fourth quarter.

YETI shares trade at 26 times analysts’ estimates for next year’s earnings and 3.6 times trailing 12-month sales. That’s hardly cheap, but it seems reasonable considering Yeti’s strong growth prospects and analysts’ continued bullishness on the name.

Freshpet

MARKET VALUE: $2.4 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 5 Strong Buy, 1 Buy, 5 Hold, 0 Sell, 0 Strong Sell

Conservative investors might be tempted to lay off New Jersey-based Freshpet (FRPT, $66.65) in 2020.

Don’t. While the manufacturer of natural pet food is up 344% since its initial public offering in November 2014, it has only just begun its pathway to profitability and is among several encouraging stories in the budding pet stocks space.

Freshpet is projecting 26% revenue growth to $244 million for its fiscal 2019, as well as a 43% jump in adjusted EBITDA (earnings before interest, taxes, deductions and amortization – a popular measure of operational profitability that backs out various accounting deductions) to $29 million. When the company went public five years ago, it had annual sales of just $63 million and an adjusted EBITDA loss of $192,000.

In its Q3 2019 report, Freshpet said that it converted three out of four manufacturing facilities from five-day production to seven-day. In the first quarter of 2020, it plans to convert its fourth facility to seven-day production. FRPT also is adding 90,000 square feet to its Lehigh Valley plant in Pennsylvania.

“With this rapid growth that we have, that capacity will get us about $540 million in net sales,” CEO Billy Cyr told those in attendance at January’s 2020 ICR Conference in Orlando. “We’re already envisioning the next increment in capacity that will provide us the opportunity to get up to $1 billion in sales and that will require new capacity to come online in 2022.”

Translation: FRPT is among the best mid-cap stocks to buy for a somewhat longer time horizon, as the next three to five years should see this growth in capacity flowing back to shareholders.

Aaron’s

MARKET VALUE: $3.8 billion

DIVIDEND YIELD: 0.3%

ANALYSTS’ OPINION: 9 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong Sell

It’s hard to fathom a company such as Aaron’s (AAN, $56.93), which made a name for itself hawking consumer goods on a lease-to-own basis, would do well in a strong economy. However, because it focuses on consumers with a FICO score between 500 and 700, which represents approximately 40% of the U.S. population, Aaron’s is able to find customers in good times and bad.

Aaron’s, which boasts 1,163 company-owned and 341 franchised store locations, estimates that the entire U.S. lease-to-own market is worth $25 billion to $35 billion annually, providing the company with a large, addressable market. Furthermore, 78% of Americans are said to live paycheck to paycheck, which suggests the need is high.

Stephens financial analyst Vincent Caintic has Aaron’s among the best mid-caps to buy right now, recently naming AAN as one of the independent financial services firm’s “top picks” for 2020.

Although Aaron’s fleet of traditional brick-and-mortar stores has been its primary growth vehicle, things changed in April 2014 when it acquired Progressive Finance Holdings for $700 million. Progressive provides lease-to-own financing to other traditional retailers, which Aaron’s calls virtual rent-to-own.

“In contrast with slowing consumer demand for financing (as we’ve seen with credit cards and auto lending), virtual rent-to-own should do well in 2020, primarily because the industry is still in its nascent growth stage. Customers who have not had point-of-sale financing opportunities in the past will now increasingly have the option due to the Aaron’s offering,” Caintic wrote in a January note to clients. He has an Overweight rating (equivalent of Buy) with a 12-month target price of $80 per share, indicating 40% upside from current prices.

Five Below

MARKET VALUE: $6.5 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 16 Strong Buy, 1 Buy, 4 Hold, 1 Sell, 0 Strong Sell

Five Below (FIVE, $116.11) is a growing discount store that caters to teens and tweens, but also has a large following from adults who simply like the fact most of the retailer’s products are sold at $5 or less.

Although Five Below had a choppy year in 2019, it still managed to generate a 25% total return for shareholders. Unfortunately, its stock tumbled more than 11% on Jan. 13 after providing holiday-season sales and updated fourth-quarter guidance figures that weren’t as robust as investors were expecting.

“While our comparable sales during key holiday selling periods were positive, they were not strong enough to overcome the headwind of six fewer shopping days between Thanksgiving and Christmas, and overall sales did not meet our expectations,” CEO Joel Anderson said in the company’s press release.

Five Below isn’t the only retailer to suffer an unexpected setback in the holiday shopping season between Thanksgiving and Christmas. Target (TGT), for instance, dropped on Jan. 15 after reporting that its same-store sales in November and December grew by just 1.4%, below the company’s expectations.

These things happen, and Wall Street knows it.

Since Five Below’s holiday-season report, 12 of 13 analysts have sounded off with Buy recommendations, albeit a couple of those lowered their price targets on the stock. However, Credit Suisse analyst Judah Frommer responded by upgrading FIVE from Neutral (equivalent of Hold) to Outperform (equivalent of Buy) with a $125 price target. He believes given that Five Below’s same-store sales on Black Friday, CyberWeek and the last seven days of the holiday shopping season were all positive, the worst is behind it.

Future catalysts include thawing U.S.-China trade relations and the remodels of more than 60 locations. Furthermore, Five Below continues to open “Ten Below” sections – stores-within-a-store selling merchandise up to $10 – in new and remodeled locations. Investors should continue to buy this mid-cap stock on any major dips in its price.

Scotts Miracle-Gro

MARKET VALUE: $6.8 billion

DIVIDEND YIELD: 1.9%

ANALYSTS’ OPINION: 4 Strong Buy, 0 Buy, 4 Hold, 0 Sell, 0 Strong Sell

If your house has a big patch of grass, you’re likely familiar with Ohio-based Scotts Miracle-Gro (SMG, $123.06), whose consumer lawn and garden products are used by millions of Americans to keep their lawns healthy and green.

Scotts isn’t a highflier, but rather a company with a modest goal of delivering annual growth of 2% to 4% in sales, 4% to 6% in operating profits and 8% to 10% in per-share earnings growth, ultimately leading to shareholder returns of 10-12% annually.

Core brands such as Scotts, Miracle-Gro and Ortho deliver stable cash flow. However, it is the company’s Hawthorne Gardening Company subsidiary, which it created in October 2014, that has driven Scotts’ revenue growth in the five years since.

In April 2018, Scotts announced the acquisition of Sunlight Supply – the largest hydroponic distributor in the U.S. – for $450 million. It combined Sunlight with Hawthorne, whose target market is professional growers, including cannabis producers. Scotts said that the combined entity would record annual sales of $600 million and sell to more than 1,800 hydroponic retail stores in North America. Indeed, Hawthorne’s 2019 revenues rocketed by 95% to $671.2 million. Excluding the sales from its Sunlight acquisition, sales still grew by 24%, which was three times the revenue growth of its U.S. consumer business. In 2020, SMG expects Hawthorne to grow its sales another 12% to 15%, compared to 1% to 3% for its U.S. consumer division.

“The momentum in Hawthorne has been building all year, and we saw our highest levels of organic growth in the fourth quarter, giving us a high degree of confidence as we look ahead into fiscal 2020,” CEO Jim Hagedorn said in the company’s Q4 2019 earnings release.

As the cannabis industry continues to mature, Scotts’ stock will remain an important holding of most, if not all, cannabis ETFs.

Cannae Holdings

MARKET VALUE: $3.2 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 1 Strong Buy, 0 Buy, 0 Hold, 0 Sell, 0 Strong Sell

Over the past year, Cannae Holdings (CNNE, $40.31) has generated a return of 93% for shareholders over the past year. But … what exactly is it?

Cannae, a Las Vegas-based mid-cap holding company, is the new identity of former Fidelity National Financial (FNF) investment subsidiary Fidelity National Financial Ventures. The company broke away from FNF in November 2017. The architect of that spinoff is Executive Chairman William Foley II, a Fidelity National founder who served as the title insurance firm’s CEO until 2007 and has been chairman ever since.

One of Cannae’s current biggest investments is a 16.5% stake in Ceridian HCM (CDAY), the human capital management software company behind Dayforce, which Ceridian acquired in 2012. Another big investment is Cannae’s 24.5% stake in data analytics firm, which it acquired as part of an investment group that bought the firm for $6.9 billion in February 2019.

Since Cannae was created in 2014, it has generated $1.9 billion in realized value for shareholders from investments in restaurants, human capital management, automotive, data analytics and more. That has translated into a roughly 20% internal rate of return. The most recent realization for Cannae shareholders was four secondary offerings of Ceridian stock that generated $575 million in total net proceeds.

Of the best mid-cap stocks you can buy, Cannae is likely the most unsung. But it’s worth considering nonetheless.

Gray Television

MARKET VALUE: $2.2 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 7 Strong Buy, 0 Buy, 0 Hold, 0 Sell, 0 Strong Sell

As its name suggests, Gray Television (GTN, $21.97) owns television stations in 93 different American markets. Its stations are ranked either first or second in 95% of those markets.

You might think it odd to see a TV-station owner amid a group of “growthy” mid-cap stocks in 2020. But the Robinson family – who still controls the company 27 years after Georgia entrepreneur Mack Robinson acquired what was then called Gray Communications, a small operation consisting of three TV stations – has nurtured this business into a $2 billion-plus company that delivers strong, albeit volatile, returns. GTN has outperformed the S&P 500, 115% to 63%, over the past five years.

Gray completed a $3.7 billion cash-and-stock acquisition of Raycom Media in January 2019. The deal made Gray’s portfolio of 142 stations the third-largest portfolio in the U.S., covering 24% of all households and doubling its annual revenues to more than $2 billion. It also plunged the company into larger markets including Tampa Bay, Charlotte, Cleveland, Cincinnati, West Palm Beach and Birmingham.

In November, Gray announced the company’s best third-quarter results in its history, thanks in large part to the Raycom acquisition. Through the first nine months of fiscal 2019, it produced $499 million in adjusted EBITDA and was on target to generate $85 million in annualized first-year synergies.

When Gray announced the Raycom acquisition in June 2018, it committed to paying down the debt quickly. When the deal closed in early 2019, net debt was approximately five times operating cash flow (OCF). By the end of September 2019, it was down to 4.5 times OCF. Gray aims to reduce that figure to below 4 times OCF in fiscal 2020. Most of the cash not going toward debt will pay for stock buybacks as part of the $150 million repurchase authorization the board approved in November.

When it comes to owning television stations, scale is everything. The Raycom deal put Gray in the big leagues.

Verint Systems

MARKET VALUE: $3.9 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 7 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong Sell

Investors have roughly a year to buy Verint Systems (VRNT, $57.82) before the mid-cap cloud-based software company, which provides customer engagement and cyber intelligence solutions, splits into two publicly traded businesses.

Verint announced the decision on Dec. 4, 2019. It also said at the time that private equity firm Apax Partners would invest $200 million in Verint’s customer engagement business in April 2020, and a second sum of $200 million once the two businesses officially separate, which is expected to happen shortly after the company’s fiscal year ended Jan. 31, 2021.

“Apax Partners has a proven track record of creating value by partnering with leading software companies around the world, including significant experience in both carve-outs and cloud transitions,” Verint CEO Dan Bodner said in a statement. “The investment represents a strong vote of confidence in our strategy and future growth opportunities.”

Verint also will undertake a new share repurchase authorization program that permits it to buy back up to $300 million of its stock before Feb. 1, 2021.

VRNT shares have spiked by more than 20% since it announced the split. But the upside remains excellent. Following the split, investors will own shares in a customer engagement business that generates annual revenue of almost $1 billion, and a cyber intelligence unit with annual sales approaching $500 million.

The separation will allow both businesses to focus on growing their respective units while simultaneously making it easier for investors to evaluate both businesses. Buying Verint stock prior to the separation allows you to buy in before their respective growth stories get transmitted to the wider investment community. Better still, at 14.4 times forward-looking earnings estimates, VRNT gets you growth at a reasonable price.

Simply Good Foods

MARKET VALUE: $2.3 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 7 Strong Buy, 2 Buy, 1 Hold, 0 Sell, 0 Strong Sell

If you’re familiar with the Atkins diet, you might also be aware of Simply Good Foods (SMPL, $23.84). The company was created in July 2017 with the merger of Conyers Park Acquisition Corp. and Atkins Nutritionals, the health and wellness brand created by cardiologist Dr. Robert Atkins.

Simply Good Foods, which also includes the Quest Nutrition and Simply Protein brands, provides premium-priced snacks and meal replacement products to North American consumers interested in healthier alternatives.

In November 2019, Simply Good Foods acquired Quest Nutrition LLC for $1 billion in November 2019. Quest brought to the table $345 million in annual sales, 17% annual sales growth, and annual adjusted EBITDA of $70 million, including $20 million in run-rate synergies following the acquisition. Both companies have asset-light, low-capital-spending business models that should provide long-term profit growth.

For the quarter ended Nov. 30 – the first quarter of its 2020 fiscal year – SMPL’s revenues grew 25.8% year-over-year to $152.2 million, while adjusted EBITDA rose 19.1% in the quarter, to $31.8 million. Thanks to the Quest Nutrition acquisition, it expects revenues and adjusted EBITDA in fiscal 2020 to hit $850 million and $154 million, respectively.

The base case is simpler: As long as Americans remain concerned about eating healthier, Simply Good Foods should remain an attractive investment.

Newmark Group

Getty Images

MARKET VALUE: $2.2 billion

DIVIDEND YIELD: 3.3%

ANALYSTS’ OPINION: 4 Strong Buy, 1 Buy, 1 Hold, 0 Sell, 0 Strong Sell

Newmark Group (NMRK, $12.26) is a New York-based, full-service commercial real estate advisory firm that provides services to both real estate investors, owners and tenants. Newmark was spun off from BGC Partners (BGCP) in November 2018.

Newmark grew its revenues by 18% year-over-year to $2.2 billion during the trailing 12 months ended Sept. 30, 2019. It also boasted an adjusted EBITDA margin of 25% – significantly higher than any of its major peers. Also, the business model generates significant recurring revenue. Roughly 67% of NMRK’s sales were recurring over the past year, with the rest considered transactional in nature. That number has been slowly but steadily rising; recurring revenues were 61% of overall sales in 2016.

The estimated global revenue for commercial real estate services is $225 billion. Newmark currently accounts for approximately 1% of this amount and 6.5% of the 10 largest CRE brokerages.

Multifamily investment sales will be a key area over the next few years. That’s because an aging population likely will result in many people selling their homes and moving into multifamily rental properties. That should heat up the buying and selling of apartment buildings, creating demand for Newmark’s CRE services.

Newmark’s overall business is more explosive than it might seem on its face. The company’s revenues have grown by 34% compounded annually. In the future, its annual growth should slow to 20% a year – a more sustainable figure for a company with more than $2 billion in annual sales. Now, NMRK shares just need to reflect that reality.

Envestnet

MARKET VALUE: $4.3 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 10 Strong Buy, 2 Buy, 0 Hold, 1 Sell, 0 Strong Sell

Envestnet (ENV, $81.51) got its start in 1999, when the late Judson Bergman, founder and former CEO, recognized that independent investment advisors needed an integrated wealth management platform to meet the growing expectations of investors. Today, Envestnet’s platform has total assets of $3.4 trillion and performs billions of transactions on an annual basis, helping more than 100,000 financial advisors manage their growing wealth management practices.

The mid-cap’s business model boasts an excellent mix of organic growth combined with an aggressive acquisition strategy. Evestnet grew sales by 24% annually between 2008 and 2018. At the same time, it grew adjusted EBITDA by 28% annually over the same decade. Down the road, ENV plans to grow revenues and adjusted EBITDA by at least 15% and 18%, respectively – slower than before, but still brisk growth given the company’s current size.

Despite helping a significant number of financial advisors already, the growth opportunities are significant. Envestnet says that by simply growing its existing relationships with 88,000 of its existing advisors, ENV could add $4 trillion to its platform. By adding 130,000 new advisors, it could add an additional $12 trillion to its platform.

Envestnet generates three streams of revenue: asset-based recurring revenue, which accounted for 54% of sales during the nine months ended September 2019; subscription-based recurring revenue (42%) and professional services (4%). Overall, sales grew by nearly 10% year-over-year.

A new growth opportunity to watch: In January, Envestnet’s portfolio consulting group, in conjunction with Invesco (IVZ), launched seven new model portfolios that combine passive and active fund management, providing advisors with enhanced returns for their clients while managing the downside risk. Including these seven portfolios, Envestnet’s ActivePassive Portfolios account for $4 billion in assets under management on its platform. This number could grow considerably in the coming years.

Kennedy-Wilson Holdings

MARKET VALUE: $3.2 billion

DIVIDEND YIELD: 3.9%

ANALYSTS’ OPINION: 4 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong Sell

Kennedy-Wilson Holdings (KW, $22.42) is another real estate play among these mid-cap stocks to buy. It owns, operates, and invests in multifamily and office properties in the Western part of the U.S., U.K. and Ireland. As of Sept. 30, 2019, KW had an ownership interest in approximately 48.1 million square feet of property, including 28,173 multifamily rental units. Its investment portfolio has a book value of $11.8 billion. On average, Kennedy-Wilson has an ownership stake of 60% in each of its investment properties.

Kennedy-Wilson has two operating units: KW Investments, which holds the real estate interests it owns, and KW Investment Management and Real Estate Services (IMRES), which generates fees by managing and operating real estate owned by other investors.

In late December, Kennedy-Wilson announced the closing of Kennedy Wilson Real Estate Fund VI – a $775 million fund that will focus on value-add real estate investments. The company put $82 million of its own capital into the fund, which will be able to acquire up to $2 billion in commercial real estate. As of the start of the year, Real Estate Fund VI had already committed $386 million in capital, acquiring $1.1 billion in real estate and adding to the revenue generation potential of its investment management unit.

“Institutional investors continue to show a strong appetite for real estate in West Coast markets, many of which are leading the country in job creation, wage gains and technology trends,” Nicholas Colonna, Kennedy Wilson’s president of commercial investments and fund management, said in a press release.

One last note: CEO William McMorrow has been chief executive of the company since 1988, and he owns 9.3% of its stock. Remember: Insiders with considerable “skin in the game” have additional motivation to drive shareholder value.

Helen of Troy

MARKET VALUE: $4.9 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 4 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell

Helen of Troy (HELE, $195.77) likely brings to mind Greek mythology. Helen was the daughter of Zeus and Leda, and her twin brothers were Castor and Pollux. Interestingly, Castor & Pollux is a fairly well-known natural pet food brand in the U.S.

Helen of Troy is a consumer products company, too, but it deals in the health, housewares and beauty segments. Its brands include Vicks humidifiers and vaporizers, OXO cooking and baking utensils and Sure deodorant, and most of them have been cobbled together through more than a dozen acquisitions since 2003.

However, Helen of Troy broke a roughly three-year M&A dry spell in January 2020, when it paid $255 million in cash for Drybar Products LLC. You might be familiar with the Drybar blowout hair salons that have become popular in recent years. HELE is purchasing Drybar’s line of hair-care products, while Drybar Holdings LLC will continue to operate its hair salons.

“Drybar will complement our Revlon and HOT Tools products, allowing our brands to resonate with consumers and professionals across the good, better, and best (hair appliance) segments,” CEO Julien Mininberg said about the transaction.

Helen of Troy might continue to seek out acquisitions that add value to its three operating segments, whether it be of the smaller, tuck-in variety or larger, transformational deals, but the latter are more difficult to come by.

In its most recent quarter ended Nov. 30, HELE boasted sales growth of 10.1% to $474.7 million, and a 25.2% pop in adjusted operating profits to $79.1 million. Results like that, which have driven 69% price gains over the past year, will keep Helen of Troy among the best mid-cap stocks to buy.

Brookfield Renewable Partners LP

MARKET VALUE: $9.3 billion

DIVIDEND YIELD: 4.2%

ANALYSTS’ OPINION: 2 Strong Buy, 0 Buy, 8 Hold, 0 Sell, 1 Strong Sell

Brookfield Renewable Partners LP (BEP, $52.02) is one of the world’s largest publicly traded owners and operators of renewable energy facilities. Its current portfolio has more than 18,000 megawatts of capacity from 5,253 generating facilities on four continents, including North America.

Hydroelectric power accounts for 74% of BEP’s assets, with wind, solar, distributed generation and storage facilities accounting for the rest. The global investment in new renewable energy in the 2010s was estimated to be more than $2.6 trillion, and yet it still accounts for a small percentage of the global power generation.

“Investing in renewable energy is investing in a sustainable and profitable future, as the last decade of incredible growth in renewables has shown,” Inger Andersen, executive director of the United Nations Environment Program said in September. “It is clear that we need to rapidly step up the pace of the global switch to renewables if we are to meet international climate and development goals.”

Brookfield expects to be a leader in the years to come. Its goal is to deliver long-term total returns of 12% to 15% per unit (for master limited partnerships like Brookfield, a unit is like a share of a traditional company’s stock) from its $50 billion in worldwide power assets. Between 1999 and 2018, Brookfield Renewable generated an annual total return of 16%, which is significantly higher than the 6% total return for the S&P 500.

While BEP might be one of the best mid-cap stocks to buy, it’s also among the easiest to accidentally trip over. That’s because you can buy the company in three different ways. First, you can buy BEP units, which are listed on the New York Stock Exchange. Second, the company plans to create a second investment vehicle, a Canadian corporation, which will also list on the NYSE under the symbol BEPC; Brookfield is doing this to increase the company’s inclusion in major indexes that can’t invest in master limited partnerships. The third option is to invest in Brookfield Asset Management (BAM), which owns 60% of the company.

No matter what you choose to do, Brookfield Renewable is participating in one of the biggest secular trends of the 21st century. It makes sense to own a piece of history.

Canada Goose

MARKET VALUE: $3.7 billion

DIVIDEND YIELD: N/A

ANALYSTS’ OPINION: 9 Strong Buy, 0 Buy, 4 Hold, 0 Sell, 0 Strong Sell

Canada Goose (GOOS, $33.30) – the company best known for its down jackets filled with real goose feathers, and worn by celebrities and average consumers alike – is a mid-cap stock that might soar eventually. But it’s also one of those companies that clearly will suffer growing pains on its way to greatness. Lululemon (LULU), another great Canadian brand, went through a number of highs and lows before it took flight in 2019.

Canada Goose did not take flight last year. In 2019, GOOS shares lost 17% while the S&P 500 logged a 29% gain – its best year since 2013. The firm has experienced a rough start to 2020, too. Most recently, it warned on Feb. 7 that various headwinds, including the impact of the coronavirus on Chinese sales, would weigh on its 2020 results. That’s unfortunate, because outside the temporary setback, the company’s Chinese expansion has been proceeding nicely.

One of Canada Goose’s biggest problems hasn’t been operational, but in setting expectations – something that has frustrated analysts and investors alike.

“Demand remains exceptional, but communication leaves our feathers ruffled,” Susquehanna Financial Group analyst Sam Poser wrote in a note to investors in November, after Canada Goose warned about a significant revenue decline for its fiscal third quarter.

However, Poser also called GOOS “one of the few true growth stories in the consumer discretionary sector” and said that “if communication does improve, multiple expansion will follow, in our view.” While he recently lowered his price target to $50 per share to reflect the company’s current hurdles and recent price movement, he maintained a Buy-equivalent rating, and his target still reflects 50% upside. Poser’s hardly alone – despite Canada Goose’s issues, nine of 13 analysts tracked by The Wall Street Journal say to buy the company’s shares.

One thing to watch for going forward is whether Canada Goose proves it can compete with luxury players such as Italy’s Moncler SpA.

“Canada Goose is still a relatively small brand, with about two thirds of its sales in North America,” Bloomberg Intelligence analyst Maxime Boucher recently told Financial Post. “It must use the next few quarters to establish itself as a top global luxury player.” Boucher goes on to suggest that it also needs to reduce its inventories to levels more befitting a luxury brand.

Should it do that, GOOS will unlock the potential that drove investors into a buying frenzy for the first year after its 2017 IPO.

Author: Will Ashworth

Source: Kiplinger: 15 Mid-Cap Stocks to Buy for Mighty Returns

One of the simplest things that everyday investors can do to improve their performance over the long haul is to study the best practices and investments of the world’s top investors. And while that typically invokes names such as Warren Buffett and Carl Icahn, don’t forget the money managers overseeing billions of dollars at mammoth pension funds.

Understanding the secrets of large-scale investors can put you miles ahead of those people who simply wing it without first coming up with a long-term plan. One way investors can shortcut the process is to follow the top stocks of these top investors. Indeed, following the moves of Warren Buffett has become a quarterly ritual.

But while following the stock picks of big-name investors such as Buffett, Bill Ackman and Carl Icahn is an excellent way to hone your skills, another place many people fail to consider is pension funds.

Even the largest pension funds might not have the same recognition as Buffett or Icahn. Nonetheless, CalPERS and the New York State Common Retirement Fund manage billions of dollars for the public state and local employees of California and New York. They and other pension funds have a fiduciary duty to current and former employees who are saving for retirement.

As a result, it pays to follow pension funds’ highest-conviction stock picks, too. Many of these funds have high concentrations in several of the same stocks, so just note that if a stock is a major holding in one fund, chances are it holds significant sway across numerous pension systems on this list.

Author: Will Ashworth

Source: Kiplinger: 10 Top Stock Picks of America’s Largest Pension Funds

Aurora Cannabis (NYSE:ACB) reports its Q1 2020 earnings on Nov. 11. As a result of analyst downgrades and a generally dour view of the cannabis sector at the moment, ACB stock remains a falling knife best avoided until the company and industry can provide better news.

I’m not souring on Aurora — my most recent article about the company provided three catalysts that will boost Aurora Cannabis stock over the long haul — it’s just that $4.50 looked like a good entry point at the beginning of October. Yet ACB stock has fallen another 12% since then through Oct. 30, suggesting it still hasn’t found the bottom.

If you are willing to hold for 3-5 years, I don’t believe buying ACB stock at current prices presents too much downside for the long-term investor.

Park Your Money in This ETF

For those who want to go long Aurora but are worried about getting burnt by individual marijuana stocks, parking your money in the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is a wise move.

With cannabis stocks trending lower, you are still likely to see some temporary paper losses from owning MJ. However, you’re not exposing yourself to the company-specific risk that Aurora still presents.

In June 2018, I suggested that marijuana ETFs such as MJ are much safer to own than individual stocks, at least until the industry sorts itself out. More than a year later, I still feel it’s a good Plan B.

“It’s possible that Aurora will become the most valuable public company in the world surpassing Amazon (NASDAQ:AMZN) and the rest of the big hitters, but it’s not probable,” I wrote on June 6, 2018.

“By investing in marijuana ETFs you’ve decided to diversify your bet understanding the difference between possible and probable. There wouldn’t be marijuana ETFs if a large portion of investors didn’t think this way. By playing it a little safer, you’re doing the right thing.”

Consider the returns of MJ’s top five holdings, which includes Aurora.

ETFMG Alternative Harvest ETF’s Top 5 Holdings

Except for GW Pharma, a stock I like, which isn’t a producer of cannabis, but rather a user of cannabis to create drugs meant to treat specific forms of epilepsy, you would have been better off buying the ETF last October than focusing on one or two of the four cannabis producers listed above.

Why Not Cash?

Although it’s tempting to leave the money in cash until cannabis stocks go on a bit of a run, market timing is never the best solution because you’re always going to be late to the party.

As the saying goes, “It’s not timing the market that wins; it’s the time in the market that does.”

I don’t have a crystal ball that tells me when a stock is going to zoom higher. All I know is that the cream usually rises to the top.

If you’re thinking about buying Aurora stock, you might want to buy the MJ ETF with the allotted amount of money you were contemplating putting toward ACB until sometime in 2020.

How will you know when in 2020?

You’ll know.

Author: Will Ashworth

Source: Investor Place: This Marijuana ETF Is a Smart Way to Play Aurora Cannabis Stock

If you’re looking for stocks to buy based on the earnings reports of companies who have already reported in the third quarter, you can already write off Twitter (NYSE:TWTR) and Boeing (NYSE:BA).

FactSet Research (NYSE:FDS) analyst John Butters projects that the S&P 500 earnings in the third quarter will fall by 4.7%, the third consecutive year-over-year earnings decline from the index, and the first time since Q2 2016.

While Twitter was able to grow its monetizable daily active users in the quarter, it faces several headwinds that could persist into 2020. As for Boeing, the giant elephant in the room remains the 737 Max, which the company expects will get regulatory approval to return to service by the end of 2019, but has caused major declines in the company’s revenue and profits.

Although both Twitter and Boeing’s earnings reports had holes so big you could drive a truck through them, it doesn’t necessarily mean that you shouldn’t consider owning their stocks for the long haul. Here are 10 stocks to buy regardless of Q3 earnings.

Stocks to Buy: Diamondback Energy (FANG)

Although I’m not a big fan of energy stocks, I’ve tried to include at least one stock from several different industries. That’s why Diamondback Energy (NYSE:FANG) made the cut.

If you invested $10,000 in FANG five years ago, today you’d have $13,094.90. That sounds bad until you consider that the same investment in its oil & gas exploration and production peers would have resulted in a loss of $4,406.52 over the same period. The grass is always greener.

At the beginning of October, Diamondback’s COO, Michael Hollis abruptly resigned from the company after eight years, the last four as head of operations. Before joining Diamondback, Hollis worked for Chesapeake Energy (NYSE:CHK).

While Hollis was wise to leave Chesapeake when he did — its stock was above $20, 10 times where it’s currently trading — no one is irreplaceable.

Down 15% year-to-date including dividends through Oct. 28, FANG provides great value despite lower oil prices.

Lululemon (LULU)

I asked myself in May: “Can Nike (NYSE:NKE) hit $185 in the next five years?”

My answer: “If I owned Nike stock, I’d be concerned that Lululemon (NASDAQ:LULU) will soon generate more revenue from the men’s market as a percentage of its overall sales than NKE does from the women’s market,” I wrote May 23.

Don’t get me wrong. I like Nike and what it has been able to do with its Swoosh logo. However, it is Lululemon that made wearing sportswear an everyday event. Not Nike.

In August 2016, I stated that Lululemon stock would be one of the best performing S&P 500 stocks over the next 10 years. To date, it’s up 40% compared to 11.5% for the S&P 500.

For me, it all came down to the men’s market. If it could deliver growth in this area, it would have no trouble being one of the index’s shining stars.

Bloomberg Intelligence recently named LULU one of the 50 companies to watch in 2020 out of 2,000 possible choices.

“Innovation is driving results, as is Lululemon’s ‘power of three’ push focusing on men’s, digital, and international businesses,” stated Bloomberg’s Poonam Goyal Oct. 22.

CEO Calvin McDonald is just getting started.

Nike (NKE)

While Lululemon has done a great job taking the battle to its bigger opponent, there’s no question that Nike still has what it takes to ring up sales on the register.

On Oct. 22, Nike announced that long-time CEO Mark Parker would move upstairs on Jan. 13 into the Executive Chairman’s role after 13 years as chief executive.

“To be clear, I’m not going anywhere,” Parker said. “I’m not sick. There are no issues I’m not sharing. I strongly believe the best way for us to evolve and grow as a company is to bring in a phenomenal talent to join our team who has long been part of the Nike family.”

Between the corporate culture issues that have plagued the company in recent years combined with recent allegations that Parker condoned doping by Nike athletes, it was time for him to move aside.

Parker is a youthful 64 years of age, but that’s too old to be hanging around the gym. His successor, John Donahoe, at 59, isn’t much younger. However, five years is an eternity in the sports business.

Donahoe and Parker (it’s not as if he won’t be around the Nike campus) can work to find a real successor, someone in their mid-to-late 40s, who understands both the sports business and brick and mortar retail.

Berkshire Hathaway (BRK.A, BRK.B)

When I read articles about investment managers selling their stakes in Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) because Warren Buffett’s lost his touch, I just chuckle.

The Motley Fool’s Sean Williams recently discussed how Wedgewood Partners CIO David Rolfe sold his firm’s $123-million position in Warren Buffett’s company in the third quarter, expressing dissatisfaction with some of the Oracle of Omaha’s moves.

“Further, the efficacy of putting this cash pile to work (plus +$25 billion in annual operating cash flows in Omaha) will be paramount if Berkshire Hathaway is to once again regain their former status as a meaningful grower over just baseline U.S. GDP growth,” Rolfe’s Q3 letter to shareholders stated.

With all due respect to Mr. Rolfe, I’d like to see how he would do investing more than $700 billion in total assets. It’s a lot easier to invest $2 billion than it is $700 billion.

Listen, I don’t think Warren Buffett’s perfect either. In June, I listed off seven ways to make Berkshire Hathaway stock more attractive. However, if you hold BRK until it’s liquidated once Buffett’s gone, I’m sure you’ll make out just fine. The company continues to be the biggest fund on the NYSE that’s trading at a discount.

SVB Financial (SIVB)

SVB Financial (NASDAQ:SIVB), known as the bank for innovators and entrepreneurs, hasn’t had an easy time of it so far in 2019. SIVB has crossed above $220 on four occasions this year, only to retreat back to $210 or lower each time.

A year ago in August, SIVB stock was trading above $325. I should know. In September 2018, I recommended SIVB as one of seven bank stocks to own for the long haul. It’s been on a downhill slide ever since. And it doesn’t look like things are going to get much better in the near-term.

On Oct. 24, after the markets closed, SIVB announced its Q3 2019 earnings. As expected, they weren’t as good as the second quarter, but on a per-share basis they were better than a year earlier — earnings per share were $5.15 a share, five cents higher than in the third quarter last year — suggesting that despite some short-term interest rate headwinds, the overall banking business is still in very good shape.

It continues to be my favorite U.S. bank.

Intuitive Surgical (ISRG)

Intuitive Surgical (NASDAQ:ISRG) is the maker of da Vinci robotic surgical systems. On Oct. 18, it reported healthy Q3 2019 results that saw revenues increase 23% to $1.13 billion with adjusted earnings of $3.43 a share, 46 cents higher than the consensus estimate and 21% higher than a year earlier.

Some analysts aren’t so sure about the company’s ability to grow da Vinci sales. “On the one hand, we admire the company for having created a new growth vertical in medtech and demonstrating technology leadership,” Evercore ISI analyst Vijay Kumar said in a note to clients. “On the other hand, we think revenues are likely to decelerate from the stellar 2019 levels.”

If there’s a stock to buy on weakness, ISRG would be it.

In 2016, I stated that ISRG’s cash cushion of $4.6 billion would insulate it from any cost-cutting from hospitals under the then newly-elected Trump administration.

At the end of September it had $5.4 billion in cash, cash equivalents, and long-term investments. Just as I said in 2016, ISRG is going to be just fine no matter the economic or industry headwinds.

Cummins (CMI)

Just around the corner where I live in Halifax, Nova Scotia is a Canadian military base. During Tropical Storm Dorian, when almost all of the province lost power, the base’s Cummins (NYSE:CMI) generator was humming away, helping the military assist the provincial government and hydro authorities in a province-wide cleanup.

I couldn’t tell you which Cummins unit is installed at the base, but it was impressive to see the buzz of activity while the rest of us sat around without power twiddling our thumbs.

Although the company expects its sales for fiscal 2019 to be flat to a year ago at $23.8 billion, and at the low end of its previous guidance, EBITDA should be around $3.9 billion or 16.5% of its overall sales. That’s 190 basis points than a year earlier.

Trading at just 12.7x its forward P/E and yielding a reasonably healthy 3%, CMI stock is definitely one of those stocks you can count on over the long haul.

Rollins (ROL)

In May 2016, I put together a retirement portfolio of 10 stocks that I thought would continue to outperform the S&P 500. One of those stocks was Rollins (NYSE:ROL), the champion of pest control.

The investment thesis for Rollins is simple: it generates tremendous recurring revenue while retaining a majority of its customers over the long haul. There’s nothing complex about the business, but the Rollins family, who control more than 50% of its stock, are such good operators that they make it look easy.

Over the past 15 years, Rollins stock has generated an annualized total return of 18.2%, almost double the entire U.S. market.

Rollins might not be an elegant business, but its services aren’t something you want to put off for too long, providing it with a relatively captive audience.

Alphabet (GOOGL)

I’d been thinking about choosing Amazon (NASDAQ:AMZN) over Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), but a recent article I wrote about “My Love-Hate Relationship With Amazon Stock” has me rethinking my previously held opinion that Jeff Bezos could do no wrong.

As a result, I’ve passed the baton to the folks at Alphabet whose penchant for generating oodles of free cash flow — for every dollar of sales, it has 15 cents of free cash flow — combined with just $4.1 billion in long-term debt, makes it an excellent candidate to buy back lots of its stock.

When it comes to the FAANG stocks these days, my preference leans toward Alphabet and Apple (NASDAQ:AAPL) and away from Facebook (NASDAQ:FB), Amazon, and Netflix (NASDAQ:NFLX).

In September, I suggested that the company’s “other bets,” which includes Waymo, the company’s self-driving business, is the key to its future success.

“A business that makes or saves people time and money will always be in demand in the 24/7, 365-day world in which we live,” I wrote Sept. 9.

“By continuing to invest in its other bets, it’s got a much better chance of developing the next great idea that will change the world. And that, more than anything, will influence the GOOGL stock price.”

In the meantime enjoy the ride.

Apple (AAPL)

In the previous slide about Berkshire Hathaway, I mention some of investment manager David Rolfe’s criticisms of Warren Buffett’s investments. Kraft Heinz (NASDAQ:KHC) is a big one, something I’ve also been critical of in past articles.

However, if you’re going to point out his failures, you also have to point out his successes. Of all the investments Buffett has made in publicly-traded stocks in recent years, the decision to load up on Apple has likely been his best. In January, I wrote about the seven reasons Buffett’s bet on Apple is a good one.

Ever since Tim Cook took over the CEO’s job in August 2011, there have been plenty of critics about the way he pivoted from hardware and iPhones to services such as Apple TV+, Apple Arcade, Apple Music, iTunes, etc.

Unlike Buffett’s bet on IBM (NYSE:IBM), Buffett can see that Apple’s runway to growth is still alive and well. It might not sell as many iPhones in the future, but it doesn’t have to under its rejigged business model.

He might not be Steve Jobs, but this Tim Cook version is still pretty darn good.

Author: Will Ashworth

Source: Investor Place: 10 Stocks to Buy Regardless of Q3 Earnings

Morgan Stanley equity strategist Michael Wilson suggested Oct. 14 that the mini-trade deal with China announced by Donald Trump the previous week is not going to help stocks reverse their course and move higher despite the two-day rally on the news.

“The bottom line is that without a significant roll-back of existing tariffs, we don’t see how a ‘mini-deal’ will change the currently negative trajectory of growth in both the economy and earnings,” Wilson stated.

Furthermore, Wilson sees the December 2018 bloodbath for stocks repeating itself, albeit in a slightly less dramatic fashion due to the fact monetary policy has eased and interest rates are lower.

Last year, U.S. stocks declined more in the month of December than they had since the Great Depression, with the S&P 500 and Dow Jones Industrial Average losing 9% and 8.7%, respectively.

If Wilson is correct, it’s possible that we could see stocks fall by 4-5% in December 2019, putting a bad ending on what has been a very good year.

For those who are worried about what might happen in the final month of the year, here are 10 stocks to sell before December’s meltdown.

Stocks to Sell Before the December Meltdown: Netflix (NFLX)

On Oct. 16, Netflix (NASDAQ:NFLX) reported Q3 2019 earnings that were a mixed bag.

The good news is that the video streamer reported earnings of $1.47 a share, significantly higher than the consensus estimate of $1.05, while its revenues were $5.24 billion, just $10 million lower than analyst expectations and 31% higher than a year earlier.

The bad news is that it added 6.8 million subscribers in the third quarter, 200,000 below the estimate. In the U.S., it delivered just 500,000 subscribers, 300,000 lower than analyst expectations.

Macquarie analysts Tim Nollen and Jordan Boretz did not like what they heard from the company, downgrading its stock from “outperform” to “neutral” on concerns that the streaming competition is about to get really intense — Disney (NYSE:DIS), AT&T (NYSE:T), Comcast (NASDAQ:CMCSA) and Apple (NASDAQ:AAPL) are all introducing video streaming services over the next six months.

“We think it will be hard for Netflix to grow much more in the US, and we suspect pricing power is limited,” the analysts said in a note to investors.

By the end of November, investors will have a good idea of how much damage the competition will inflict on NFLX stock.

TD Ameritrade (AMTD)

By now, most investors are likely aware that TD Ameritrade (NASDAQ:AMTD) announced Oct. 2 that it has eliminated all commissions for the online trade of U.S. stocks, options and exchange-traded funds.

“We expect Fidelity and E*TRADE to react next and announce cuts to their own commission rates over the short-term, with both likely matching SCHW’s/AMTD’s zero rate,” said Credit Suisse research analyst Craig Siegenthaler in a note to clients.

Shortly after TD Ameritrade’s announcement, E-Trade Financial (NASDAQ:ETFC) followed suit. About a week later, Fidelity joined the broker price wars by introducing zero-commission trading.

All of these cuts come on the heels of Charles Schwab (NYSE:SCHW) cutting commissions, a move that hit AMTD stock hard, sending it down by 25% on the news. It was the stock’s worst day in 20 years.

With an over reliance on commission revenue, look for TD Ameritrade’s stock to continue to feel the heat.

Mohawk Industries (MHK)

The last few years have not been good for owners of Mohawk Industries (NYSE:MHK) stock. Down 13.9% over the past 52 weeks through Oct. 16, it has got a five-year annualized total return of -0.07%. By comparison, the Morningstar U.S. Market generated almost 12% over the same five years.

Some of the past five years were good to the flooring industry, so the fact that it has performed so poorly suggests that its business needs a revamp. Not to mention its business appears to be getting weaker.

According to Benzinga, Wells Fargo analyst Truman Patterson recently downgraded MHK stock to “underperform” from “market perform,” while keeping the target price at $110.

Patterson suggested in a note to clients that global demand for its products is weakening, a sign that a recession might not be that far off. That’s not good when you consider that its inventories are rising at double the level of its sales, which should lead to lower gross margins over the next few quarters.

Slowing global growth is a big reason that I recommended in September that Mohawk put itself up for sale. If it doesn’t do something over the next few months, you can be sure it will test sub-$100 prices.

Terex (TEX)

Two analysts downgraded Terex (NYSE:TEX) stock recently.

Citigroup analyst Timothy Thein cut its rating from “neutral” to “sell” Oct. 15, while also cutting the target price by $3 to $24, about 10% lower than where it currently trades.

The second research firm to cut the crane manufacturer’s rating is Barclays. Analyst Adam Seiden downgraded Terex from “equal weight” to “underweight” on Oct. 11. Making matters worse, the analyst also cut its target price by $13 to $20, 30% lower than where it currently trades.

Seiden believes that Terex’s business with rental companies is going to slow as the economy moves closer to a recession. In addition, its aerials business should see lower pricing in 2020 as a result of lower demand.

Both of these downgrades suggest that TEX stock will continue to deliver mediocre returns for its shareholders.

Crowdstrike (CRWD)

It has been four months since CrowdStrike (NASDAQ:CRWD) went public at $34 a share.

The cloud-based cybersecurity firm gained almost 71% on its first day of trading, closing at $58. Rising to as high as $101.88 in August, it has since lost 50% of those gains. Some analysts expect the CRWD stock price to continue to decline over the final two-and-a-half months of the year.

On Oct. 14, Citi analyst Walter Pritchard initiated coverage of the cybersecurity stock with a “sell” rating and a $43 target price, 17% lower than its current share price.

“We see expansion into adjacencies (like EP management and cloud workload) as challenging as they are crowded already.” Pritchard wrote in a note to clients.

A few days prior to Citi giving CRWD a sell rating, Goldman Sachs analyst Heather Bellini downgraded its stock from “neutral” to “sell,” suggesting that growth expectations for Crowdstrike are unrealistic.

They say you can often buy a stock for less than its IPO price within 12-24 months.

While I don’t believe it could trade below $34 by the end of December, the low-to-mid $40’s is definitely a possibility, especially if December turns out like last year.

Domino’s Pizza (DPZ)

Back in April 2017, I wrote about Domino’s Pizza’s (NYSE:DPZ) stock outperforming Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) since they both went public in the summer of 2004.

Over 12.5 years, DPZ stock delivered a total return of 2,401%, 846 percentage points ahead of Google. It’s an unbelievable stat that shows the power of a strong brand.

And then CEO J. Patrick Doyle stepped down on July 1, 2018, after leading the pizza chain for eight very successful years. Since Doyle stepped down, DPZ stock has lost almost 9% of its value over 18 months that have been good for the markets in general.

The problem for current CEO Richard Allison, who ran the company’s international business, before taking over the top job from Doyle, is that third-party delivery services such as GrubHub (NYSE:GRUB) and Uber Eats provide hungry consumers much greater food options beyond the traditional delivery stables of pizza and Chinese food. In addition, these third-party services offer deep discounts to grab market share, crimping Domino’s same-store sales growth.

Although this discounting is unlikely to last, it’s not likely to stop before 2020, which means DPZ stock could see further deterioration in its share price and become one of the top stocks to sell if we see another market meltdown in December.

Lincoln Electric (LECO)

Over the past two weeks, a number of research firms downgraded Lincoln Electric (NASDAQ:LECO) stock.

On Oct. 9, Stifel Financial downgraded the manufacturer of welding and cutting products, from “buy” to “hold” and gave it a target price of $84, several dollars below its current share price.

A day earlier, Oppenheimer analyst Bryan Blair cut LECO stock’s rating from “outperform” to “perform” as a result of broad-based macro headwinds that will hurt the company’s sales, which are quite cyclical in nature.

Although Blair believes Lincoln has a good long-term future, an uncertain outlook makes it tough to recommend the company despite its healthy balance sheet.

According to the Wall Street Journal, 12 analysts cover LECO with just two giving it a “buy” or ‘overweight” rating, while nine rate hold and one analyst gives it a “sell” rating. The average target price is $91, less than $4 above its current share price.

United Rentals (URI)

United Rentals (NYSE:URI) reported Q3 2019 results Oct. 17 and they were pretty darn good.

On the top line, revenues were $2.49 billion, $40 million higher than the consensus estimate, and 17.6% better than its sales a year ago. Rental revenues were much higher thanks in large part to two acquisitions it made in 2018.

On the bottom line, it also beat the consensus estimate of adjusted earnings of $5.53 a share, coming in $5.96, 26% higher than a year earlier.

However, URI stock dropped as a result of its revised guidance that lowered revenues for 2019 at the high end of its range, from $9.45 billion to $9.35 billion, while also lowering the top end of its range for adjusted EBITDA, from $4.5 billion to $4.4 billion.

Earlier in October, UBS analyst Steven Fisher downgraded URI stock from “buy” to “neutral,” while taking a big chunk out of his target price, dropping it from $166 to $118 on concerns construction is going to slow over the next few months as projects get put on hold or canceled altogether.

Until the economy gets stronger, the rental business could face some serious headwinds.

Align Technology (ALGN)

Guggenheim analyst Glen Santangelo downgraded Align Technology (NASDAQ:ALGN) — the people behind Invisalign, the maker of at-home clear aligners that help straighten your teeth — from “buy” to “neutral” Oct. 7 while also cutting his target price by 20% to $200.

“It is not lost on us that the shares are down meaningfully in the wake of 2Q results, but after doing a deeper dive into the competitive landscape, we underappreciated the rapid evolution of this market,” Santangelo wrote in a note to clients. “We believe it will be challenging for sentiment to improve until there is more evidence available to validate ALGN’s long-term competitive position — and shares will likely be range-bound in the interim.”

Some of its competitors include SmileDirectClub (NASDAQ:SDC), which went public in September, Candid Co., Smilelove and SnapCorrect.

If SmileDirect’s performance is any indication — its stock is down 57% since its Sept. 11 IPO on concerns its practices put customers at risk — the teeth straightening business is about to get a whole lot more difficult.

Tata Motors (TTM)

If you bought Tata Motors (NYSE:TTM) stock five years ago, today you’d have just 21% of your original investment.

Tata, for those unfamiliar, is the Indian parent of Jaguar and Land Rover, the British business it bought from Ford (NYSE:F) in 2008 for $2.3 billion.

Despite the big gain Oct. 17 on news U.K. Prime Minister Boris Johnson had reached a Brexit deal with the E.U., TTM stock remains a major disappointment.

In 2019, it’s down almost 27%. Over the past five years, it has averaged an annualized total return of -26%.

Late in 2018, I thought the spinoff of Jaguar Land Rover made perfect sense because luxury car companies were hot. Now that Brexit might actually happen, it’s unlikely that Tata would want to part with its crown jewel, but it should, because it has made a lot of money for the company since its acquisition 11 years ago.

However, thanks to the deterioration of its business in China, once thought to be its cash cow, a Brexit deal probably isn’t enough to turnaround the luxury automaker.

Is Tata a value play or a value trap?

We’ll know by the end of December.

Author: Will Ashworth

Source: Investor Place: 10 Stocks to Sell Before December’s Meltdown

At the end of September, investment commentator Mark Hulbert discussed the idea of the short-interest ratio affecting the general direction of the markets.

While some believe that a rising short-interest ratio is a bullish sign for stocks, others such as University of Utah finance professor Matthew Ringgenberg feel otherwise.

Ringgenberg believes that by monitoring short interest, which is defined as the number of shares being shorted in a given period, you gain greater insight into the long-term direction of a stock or the markets. In fact, it’s a much better predictor of future returns than traditional metrics such as price-to-earnings, etc.

Short sellers are better informed on average than traders in general,” Ringgenberg told the Dallas News in 2015. “It’s a risky trade because their losses can be greater than the amount invested, and they have to pay a fee to borrow shares. So they are likely to trade only when they are confident in their position.”

Ringgenberg points to the massive correction in 2008 as a prime example. Higher than normal short interest in both 2006 and 2007 predicted the major declines that were to follow. The same is true in 2002, which saw a 45% decline after two years of unusually high short selling.

Regardless of which side of the argument you fall, I believe these 10 stocks to short are a good place to start if you’re looking to make some money betting against their future success.

10 STOCKS SET FOR MONSTER GROWTH

Chesapeake Energy (CHK)

Independent oil and gas producer Chesapeake Energy (NYSE:CHK) has had a tough go of it in 2019, down 37.1% year to date through October 2.

As a result, it’s not surprising that CHK is one of 39 U.S.-listed stocks with a market cap exceeding $2 billion and more than 20% of its float currently shorted. Chesapeake has 279.9 million shares short or 24.96% of its float. It would take short sellers 5.1 days to cover their positions.

I’ve been skeptical about Chesapeake for a long time.

Back in August 2018, I called CHK a massive, overpriced risk. I was reacting to an analyst’s “buy” recommendation and a $10 target price. At the time it was trading around $4.30, well above its current price below $1.40.

My biggest concern with Chesapeake was, and still is, its balance sheet. In August 2018, its long-term debt was $9.2 billion or more than double its market cap. At the end of June, it was $9.7 billion or 4.5 times its market cap.

If you’re familiar with the Altman Z-Score, we’re getting into bankruptcy territory.

National Beverage (FIZZ)

National Beverage (NASDAQ:FIZZ), the people behind LaCroix sparkling water, isn’t faring much better than Chesapeake so far in 2019. It’s down 35.7% year to date through October 2.

Currently, FIZZ has a short interest of 7.4 million shares or 63.4% of its float. Based on an average daily volume of 439,480 shares, it would take short sellers 16.9 days to cover their positions.

A lawsuit was filed in June that claimed company president Joseph Caporella, son of CEO Nick Caporella, who owns 72% of FIZZ stock, exaggerated how safe LaCroix products were.

And while the news did put a dent in its share price, the bigger issue is how it’s going to compete against PepsiCo (NASDAQ:PEP), now that it’s started to put some muscle and money behind Bubly, and other larger beverage companies are entering the fray.

Years ago, I sold Jolt Cola. I watched it speed into the stratosphere, only to fizzle out as consumers realized coffee was a smarter way to get your caffeine fix.

Wayfair (W)

Of all the stocks discussed in this article, Wayfair (NYSE:W) is the company that most confuses me. Despite losing boatloads of money, 14 analysts rate it a buy, one analyst rates it overweight, 13 give it a hold, with only three analysts giving it an underweight or sell rating.

Although W stock is up 14.4% year to date, it’s lost 28.2% over the past three months as investors came to realize that the tariffs imposed on Chinese goods imported into the U.S. by the company would be more expensive as a result, making its pathway to profitability even more difficult than it already was.

Wayfair has a short interest of 15.7 million shares or 25.4% of its float. It will take short sellers 8.0 days to cover their positions.

As long as Wayfair continues to spend too much on advertising — it spent $14.56 in advertising per active customer in the second quarter, 4.9% higher than in Q2 2018 — it’s easy to see why short-sellers find it attractive.

LendingTree (TREE)

Seeking Alpha contributor Robert Manders recently called LendingTree (NASDAQ:TREE) “a low quality business at a terrifying valuation.” Trading at 4.6 times sales and 41.2 times its forward P/E, he might be right.

In May 2018, I wrote about seven CEOs who’ve delivered for shareholders over the long haul. LendingTree CEO and founder Doug Lebda was one of the names on the list. I included his name because he’d managed to generate a total return of 3,216% between March 7, 2010, and May 3, 2018.

Very few companies produce such generous returns.

And yet, TREE has a short interest of 1.74 million shares or 22.3% of its float. Short sellers would take 9.8 days to cover their positions.

If ever there were a short recommendation based on valuation, LendingTree would definitely be at the top of the list.

Luckin Coffee (LK)

Luckin Coffee (NASDAQ:LK) is one of China’s biggest growth stories, or at least it was when it went public in May at $17 a share. However, after moving as high as $27 in late July, it’s fallen back into the high teens as investors realize that it might not be the second coming of Starbucks (NASDAQ:SBUX) after all.

In early September, I called Luckin one of the worst IPOs of 2019, primarily because its first quarterly report was a dud. Its second quarter wasn’t much better losing $100.5 million from operations, 100.1% higher than in Q2 2018.

In fairness to Luckin, it’s a much bigger business today. At the end of the second quarter last year it had 624 stores. That was up to 2,963 stores by the end of Q2 2019.

Luckin currently has 15.4 million ADR shares outstanding.

Azul (AZUL)

Azul (NYSE:AZUL) is the largest airline in Brazil with 820 daily departures to 113 destinations including 74 Brazilian cities. In addition to destinations in Brazil, it also flies to Fort Lauderdale, Orlando, Lisbon, and Porto.

It’s had a good year on the markets generating a year to date total return of 25.6%, considerably better than its airline peers or the Brazilian market as a whole.

So, why the recommendation to short?

On September 26, Delta (NYSE:DAL) announced that it was investing $1.9 billion in return for a 20% stake in LATAM Airlines (NYSE:LTM). In addition, it is contributing another $350 million into its strategic partnership with LATAM, so that it has the best chance of success.

Together, Delta and LATAM will hold the leading position in five of the top six Latin American markets from the U.S. LATAM has 322 aircraft in its fleet and is the largest airline in Latin America with more than 1,300 flights daily.

Bringing Delta into the picture means trouble for all the other airlines operating in South America including Azul.

Mattel (MAT)

Over the past year, Mattel (NASDAQ:MAT) has lost 30% of its value as it struggles to recover from the Toys ‘R’ Us bankruptcy in 2018.

Currently, Mattel’s short interest is 76.5 million shares or 22.2% of its float. It would take short sellers 16.4 days to cover its short position, one of the highest short ratios on my list.

My InvestorPlace colleague, Vince Martin, recommended MAT as a possible stock to short in late July, pointing to the company’s tremendous debt. At the time, it was almost $3 billion. However, it was the fact that its debt was almost 10 times EBITDA that really reflected poorly on the company.

If not for the sales of its action figures from Toy Story 4 in the second quarter ended June 30, which rose by 23% excluding currency, Mattel would not have reported a 4% gain in sales for the quarter. Not even close.

With negative cash flow, it’s easy to see why its short ratio is so high.

Match Group (MTCH)

If you believe in the saying, “what goes up must come down,” online dating company Match Group (NASDAQ:MTCH) ought to be at the top of your shortlist. It’s up 69.2% year to date despite a 15% decline in the past 30 days.

Match Group’s short interest is 27.7 million shares at the moment, a high 51.3% of its float. As for its short ratio, it would take short sellers 12.3 days to cover their positions. It’s not the worst by any means, but it’s still in double digits.

On September 27, Match Group announced that it received a subpoena from the Department of Justice related to the Federal Trade Commission claims that the company used fake love interest advertisements to convince people to buy paid subscriptions.

“We believe that Match.com conned people into paying for subscriptions via messages the company knew were from scammers,” said Andrew Smith, the director of the FTC’s Bureau of Consumer Protection.

The owner of such dating sites as Tinder and OkCupid denies the allegations.

However, where there’s smoke, there’s fire.

Teladoc Health (TDOC)

Teladoc Health (NYSE:TDOC) provides 24-hour, on-demand digital healthcare via smartphones, internet, video, and phone. It makes money through subscription fees paid by employers on a per-member-per-month (PMPM) basis. In addition, some plans can be a combination of subscription access fees and fees per visit.

In fiscal 2018, Teladoc generated 84% of its revenue from subscription access fees and the rest from visit fees.

Since going public in July 2015, TDOC has gained 238% in the three years since, despite not making money in any of those years. Year to date it’s up 24.2%, significantly higher than the markets as a whole and its health information peers.

It currently has a short interest of 24.0 million shares or 33.7% of its float. It has a short ratio of 18.3 days.

As we’ve experienced in recent weeks, investors have become less enamored with money-losing unicorn IPOs resulting in poor first-day trading, or in the case of WeWork, the canceling of the IPO altogether.

With Teladoc not likely to make money for some time and possessing an exceptionally high short ratio, investors might come to the conclusion that it’s not just money-losing IPOs that deserve a dressing down.

The Medicines Co. (MDCO)

The maker of pharmaceutical products has the best year to date performance of all 10 stocks to shortlisted here, up 161.4%. That’s due, in part, to positive trial data for inclisiran, The Medicine Co.’s (NASDAQ:MDCO) potentially lucrative cholesterol drug that increases the time between injections to as much as six months from current drugs that require monthly injections.

MDCO sold off all of its marketed products and raised $650 million from investors so that it could get inclisiran to Phase 3 trials and commercialization. It was a gamble that so far seems like it could pay off.

However, it now has zero revenue and nothing but expenses.

In the first six months of fiscal 2019, MDCO had a net loss of $119.9 million or $1.62 a share. If something happens to derail all of the good news surrounding inclisiran, the company is likely finished.

Perhaps that’s why it has a short interest of 23.05 million shares or 30.5% of its float. As for its short ratio, short-sellers would take 11.1 days to cover their positions.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Author: Will Ashworth

Source: Investor Place: Not all of the 10 stocks will seem like obvious short candidates but consider them just the same

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