It’s not too terribly difficult to find stocks you want to hold onto indefinitely. Warren Buffett does it all the time; his favorite holding period is “forever.” The opposite exercise isn’t nearly as easy to execute, however. Stocks are inherently intended to rise, and given enough time, most of them do exactly that.
Yet, the sad fact of the matter is, there are some publicly traded companies out there that are simply beyond salvaging. It’s unlikely any of these stocks will ever be able to make meaningful, sustained bullish progress. You’d be better off looking elsewhere for a new buy-and-hold pick no matter how compelling the value argument seems.
And which stocks are of this ilk? Although there are more than ten of them to be sure, this list of the ten most recognizable names to avoid is a great place to get started on getting a handle on the market’s worst of the worst.
In no particular order here are ten stocks to sell that cannot escape their longer-term problems:
[Editor’s Note: This article originally ran Jan. 16, 2018.]
Stocks to Sell: Snap Inc (SNAP)
There’s no denying Snapchat, owned and operated by parent company Snap Inc (NYSE:SNAP), is a clever and fun little app that lets users embellish and send pictures to their friends. “Clever and fun” aren’t the same thing as “marketable and profitable” though.
The unfortunate reality is, when it comes to social networking, being first is at least half the battle. Rival Facebook Inc (NASDAQ:FB) was first, and to the extent Facebook alone wasn’t enough to compete with Snapchat head-to-head, Facebook’s acquisition of Instagram in 2012 still put it out in front of Snapchat. In the meantime, Facebook has essentially copied Snapchat’s every feature as it was added, never letting the younger rival even have a chance of gaining any real market share.
It’s just not going to happen with such a big player already occupying the space Snap wants to occupy.
Stocks to Sell: Sears Holdings Corp (SHLD)
It was a fascinating experiment to be sure, but the experiment is over. Findings? A hedge fund manager with no retail experience probably isn’t the best choice as CEO of a department store chain that’s trying to turn things around.
Yes, that’s exactly how the Sears Holdings Corp (NASDAQ:SHLD) story has played out, driving the organization into the ground rather than rekindling it. The previous quarter’s top line fell on a year-over-basis for a 24th consecutive time, and things aren’t looking any better for the future.
Part of the problem — a big part of the problem — has been CEO Eddie Lampert’s preference for selling off revenue-bearing assets to meet short-term liquidity needs at the expense of driving much-needed recurring cash flow. Now, with no scale to speak of in an environment largely dominated by Amazon.com, Inc. (NASDAQ:AMZN), there’s not enough of a framework left to revive.
The good (or bad) news is, investors won’t have to worry about avoiding or selling Sears stock in the future. Its seeming march towards bankruptcy should mean it’s automatically removed from everyone’s portfolios sooner or later.
Stocks to Sell: Rite Aid Corporation (RAD)
In the wake of the deal Rite Aid Corporation (NYSE:RAD) just made with Walgreens Boots Alliance Inc (NASDAQ:WBA) that will ultimately put $4.4 billion in Rite Aid’s coffers and be used to pay down debt as it’s received, one would think Rite Aid has an encouraging future to look forward to.
Truth be told though, more money doesn’t solve the bigger problem Rite Aid has. Above all else, Rite Aid has a retailing problem. It’s not selling enough goods to enough people at high-enough prices. Broadly speaking, its profit margins are thinner than Walgreens and CVS Health Corp (NYSE:CVS).
Lowered interest payments will certainly help in that regard, though it remains to be seen if that will provide enough help to offset the adverse impact of shrinking scale. Rite Aid had to give up half its stores, each of which was driving much-needed cash flow. Margins may end up being even more pressured.
Stocks to Sell: GoPro Inc (GPRO)
In retrospect, it’s fairly easy to see where GoPro Inc (NASDAQ:GPRO) went wrong. While action cameras are clever and nobody disputes that GoPro makes the best action cameras in the business, at the end of the day, just not that many people want one. Even fewer want to bother paying for an upgraded one. They don’t want an expensive, camera-toting drone either, when a lower-priced one will do the trick just as nicely. It’s all contrary to what CEO Nick Wood presumed just a few years ago.
It’s the kind of actions you start to see taken at the beginning of a major corporate wind-down.
Stocks to Sell: Under Armour Inc (UAA)
Calling a spade a spade, Under Armour Inc (NYSE:UAA) CEO Kevin Plank had a great vision when he founded the company back in 1996. He just spent too much — way too much — making sure consumers recognized the name enough to want to buy the apparel it offered. Now the company is paying the piper, so to speak.
In the most recently reported twelve-month, the company only squeezed out $143 million worth of earnings on $4.9 billion worth of revenue, and is still sitting on $2 billion worth of debt … debt that’s also still growing.
Vince Martin added these numbers to his recent bearish thesis on UAA stock:
“Operating income this year is guided to $140-$150 million on nearly $5 billion in revenue, an operating margin of just 3%. That figure needs to double, at least, simply to get Under Armour EPS above 50 cents and its multiple to a more reasonable 25-30. And I’m skeptical that even another 300 bps of margin expansion is on the way.”
In simplest terms, the hole Under Armour dug itself into is just too deep.
Stocks to Sell: LendingClub Corp (LC)
The premise of crowd-funded lending is a good one. Democratizing access to funding is fair, and at the same time, it keeps traditional banks honest. On the other hand, LendingClub Corp (NYSE:LC) was initially treated as if the business wasn’t commoditized, when it really is. Rather, LendingClub was priced by investors as if it would be the big (and maybe only) name in the business, and that was simply never going to happen.
Yes, Shanda Media Limited — the investment portfolio directed by Chinese billionaire Chen Tianqiao — purchased four million shares in December, and IEG Holdings Corporation is making a bid for a controlling stake.
This institutional interest looks and seems bullish. The so-called “smart money” can make mistakes too, though. Hedge Fund manager Eddie Lampert was wrong about the turnaround potential of Sears, and SoftBank CEO Masayochi Son has watched his pet project Sprint Corp (NYSE:S) become little more than a money pit.
Stocks to Sell: PDL BioPharma Inc (PDLI)
PDL BioPharma Inc (NASDAQ:PDLI) is, in simplest terms, a fund that was specifically established to buy the rights to royalties on sales of certain drugs; cash flow was the name of the game. And to be fair, when it first got into the intellectual property business back in 2008, it was a clever idea.
As is the case with all novel business ideas though, once PDL BioPharma had proven it was worth doing, the idea became a much more competitive one. The company has since struggled to afford buying into the rights and royalties of new, patent-protected drugs because more biopharma companies are willing to do the same for themselves.
Case in point? A couple months ago, Neos Therapeutics Inc (NASDAQ:NEOS) rejected an acquisition offer from PDL BioPharma in a not-so-congenial manner … an indication of how disinterested some drug owners and developers have become in letting another outfit turn a profit on their IP.
Stocks to Sell: DineEquity Inc (DIN)
The restaurant business just isn’t what it used to be, and what it used to be wasn’t that great of an opportunity to begin with.
Margins are paper thin, competition is brutal, and consumers are fickle. Now, with the advent of meal kits like those offered by Blue Apron Holdings Inc (NYSE:APRN) and others [more on that below] and with consumers at least thinking a little more about healthy eating, the better part of the restaurant industry is fighting on too many fronts.
Among the most vulnerable of these names is DineEquity Inc (NYSE:DIN), which primarily operates Applebee’s and IHOP restaurants. Last year’s top line slumped 4.7%, and this year’s is expected to tumble another 2.0% despite the roaring economy, with a very narrow earnings improvement in the cards. The company has moved past its prime.
Stocks to Sell: Blue Apron Holdings Inc (APRN)
Speaking of the competition DineEquity is facing thanks to non-traditional meal providers like Blue Apron, don’t think for a minute that Blue Apron Holdings isn’t facing an armada of competition on its own.
It still leads the market in terms of share, to be clear, but HelloFresh, Home Chef, Sun Basket and Plated along with a slew of others are nipping at its heels. In the meantime, powerhouses like Kroger Co (NYSE:KR) and Amazon.com, Inc. (NASDAQ:AMZN) are also getting into the meal kit business. Blue Apron will struggle to compete with what’s ultimately a flawed business model. As University of Michigan business professor Erik Gordon explained back in the middle of last year:
“The economics of acquiring customers, that had to be pretty clear to them. It’s getting more and more expensive to buy customers. It’s getting more expensive to keep customers, and on top of everything else their food costs are going up, not down, and there’s probably no way to get those food costs to go back down.”
Those are hurdles Amazon and Kroger don’t have to clear.
Stocks to Sell: Netflix, Inc. (NFLX)
Last but not least, and undoubtedly the most contentious of the stocks to banish from your portfolio forever, investors can do without streaming giant Netflix, Inc. (NASDAQ:NFLX).
Yes, it’s the market leader, and the stock just hit a record high on the heels of record results. Have you taken a real close look at those results lately though? Revenue is growing, but debt is growing faster, while its operational and free cash flow — already negative — continue to get more and more negative.
Yes, the “you have to spend money to make money” adage applies. It seems, however, the company is trapped in a cycle that forces it to spend $2.00 to drive $1.00 worth of revenue growth. Now, with Walt Disney Co (NYSE:DIS) working to acquire Twenty-First Century Fox Inc (NASDAQ:FOXA) after Disney already said it was working on a streaming subscription.
In the meantime, with Hulu (and others) continuing to gain traction, streaming video is becoming a commodity. That spells trouble for Netflix, which was built from the ground up as if competition would never surface.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.