What goes up must come down – it’s true in physics, and it’s also true in the stock markets. We all know that the economy moves in cycles of growth and recession, and that the US is currently in the tenth year of a growth cycle – the longest sustained such cycle since the end of WWII. But there are warnings signs, and some market watchers are growing worried. Bond yields are low, perhaps too low, and the Federal Reserve has started rate cutting again, meaning it will have less room to maneuver in the next downturn. And Federal debt is at extraordinary levels, which some say are simply not sustainable.
So that’s the background. But it doesn’t touch what is possibly the most important point of all: simply put, the US economy and stock markets have grown much faster in recent years, and reached much greater highs, than those in the rest of the world. Standing so much higher than the rest, the US economy is poised to fall much harder when the next recession does come.
Jeffrey Gundlach, CEO of DoubleLine Capital, and an influential investor in the bond markets, has been outspoken recently about his worries for the markets in the near future. “Today, we have the S&P 500 is killing everybody else over the last ten years, almost 100% outperformance versus most other stock markets,” he says, setting the scene, and adds, “When the next recession comes, the United States will get crushed, and it will not make it back to the highs that we've seen, that we're floating around right now, probably for the rest of my career, is what I think is going to happen.”
Gundlach is suggesting that the next recession could last several years or longer. He sees Federal debt as the biggest warning flasher right now, stating that the US government’s deficit problem – its chronic inability to balance tax receipts and expenditures – will push down hard on the dollar.
OK, now that we’ve laid out the bearish case, what do we do with that information? Because using information is what TipRanks is all about. Markets are still growing, but there is a real case to be made that there is underlying fragility. One way to protect your portfolio is to get out of weak stocks. We’ve opened up the TipRanks Stock Screener tool and looked for stocks with a Sell rating and upwards of 15% downside potential. Let’s take a look at three of them, and see why Wall Street’s analysts are so wary.
United Natural Foods (UNFI)
We’ll start in the food service industry. You may think that food – being a commodity necessary for life – would be a solid foundation on which to build a business, but the food industry company’s face numerous headwinds: high overhead, low margins, volatile supply chains, and stiff competition, to name just a few. United Foods, the primary distributor for the upscale grocer Whole Foods Market, occupies an especially competitive niche in the natural and organic food segment.
In the summer of 2018, UNFI compounded the natural headwinds of its business sector by acquiring Minnesota-based grocery wholesaler SuperValu for $1.3 billion. In the process, UNFI also had to pick up SuperValu’s $1.6 billion in debt. While UNFI could afford the purchase – United brings in upwards of $10 billion in annual revenues – it was still a significant hit to the wallet and the corporate debt load.
While UNFI shares declined through most of 2019, the company looked like it was starting to turn around at the beginning of September. The fiscal Q4 report, released October 2, derailed that. Despite a strong year-over-year gain in revenue, from $2.59 billion to $6.41 billion, EPS dropped sharply, coming in at 44 cents. This was 36% below the 69-cent estimate, which itself was well below the year-ago figure of 76 cents. The fall in earnings, after the year-long slide in share value – shares in UNFI are down 11% in 2019 – reflects the impact of the SuperValu acquisition. Share value dropped sharply after the earnings report. It is clear that UNFI is still figuring out how to adjust to the new customer mix and gross margin numbers.
Karen Short, 4-star analyst with Barclays, is skittish on UNFI. She writes, “While the heavy lifting on UNFI’s transformation has been completed, FY20 guidance was below expectations and bridging to guidance remains challenging given the many moving parts. With insufficient clarity on the stability of the core business, we remain [underweight]… the path to stability on the core remains elusive for the foreseeable future so we cannot become more constructive on the name until we have clarity on how the core is performing…” Short puts a $7 price target on UNFI to go along with her Sell rating. This suggests a potential downside of 25% for the stock. (To watch Short’s track record, click here)
From BMO Capital, analyst Kelly Bania also sees UNFI as an underperformer. The analyst wrote, “UNFI reported a challenging F4Q19 which led F19 adjusted EBITDA to come in well below expectations. Guidance for F20 was below expectations and management walked back longer-term targets.” Bania’s $5 price implies a disastrous 46% downside to UNFI, in line with his "sell" rating for the stock. (To watch Bania’s track record, click here)
Overall, UNFI stock hasn’t had a Buy rating in the past three months, and the most recent reviews are evenly split between 2 Sells and 2 Holds, giving UNFI a Moderate Sell consensus view. Shares trade at a low $9.81, but the $7.50 average price target indicates that the stock may have an additional 23.55% to fall. (See UNFI stock analysis on TipRanks)
Dillard’s, Inc. (DDS)
From food wholesalers we move to the clothing industry. Dillard’s is a major department store chain in the US, with over 292 stores. The chain’s largest presence is in Florida and Texas, with 42 and 57 stores respectively, and the other 193 stores are spread across 27 more states, mostly in the South and West. DDS shares have been volatile this year, as the company struggles with declining profit margins and trouble attracting younger customers.
The difficulties saw DDS’s earnings fall by almost half in 1H19. Management put in place improvements in inventory management, boosting the chain’s efficiency and reducing the inventory gain year-over-year. In Q3 2019, DDS clobbered the estimates, bringing in a positive EPS of 22 cents when the analysts had expected a loss of 25 cents. It was a powerful performance, made more impressive when one notes that revenues slipped in the quarter, falling year-over-year from $1.46 billion to $1.39 billion.
Historically, however, DDS has not been able to sustain the kind of performance that boosts the stock. The company has managed to post short-term rallies, but each fizzles out fairly quickly – and the long-term chart trend for DDS is not encouraging. While the stock is up 17% this year – still underperforming the S&P 500, however – it is down 35% over the past five years. Management has shown that it is good at improving inventory efficiencies, but the overall picture is not encouraging.
That the big picture is somewhat grim is underscored by Deutsche Bank’s Paul Trussell. The 4-star analyst, in reviewing the recent quarterly report, wrote, “We commend management on delivering solid improvement from 1H19, especially in light of the highly promotional environment, but maintain our Sell rating as we expect full-year EBIT margin to contract by -124 bps (the company's worst performance since 2016).”
Trussell put a $44 price target on DDS to go along with his Sell rating, suggesting a 38% downside to the stock. (To watch Trussell’s track record, click here)
Dillard’s has a Moderate Sell rating from the analyst consensus, with 1 Hold and 2 Sells given in the past month. It’s important to note here that even the high estimate price target still indicates a downside to this stock – indicating that the analysts here are truly bearish. DDS is trading for $68.90, and the average price target of $49.33 implies that there 28% more room to fall on the downside. (See Dillard’s stock analysis on TipRanks)
National Beverage (FIZZ)
The fifth largest beverage company in the US may not be a household name, but some of its products are. National Beverage is the owner of Faygo and Shasta, popular regional soft drink brands, as well as the Wisconsin-based La Croix brand of carbonated water drinks. The company also owns and distributes several additional lines of soft drinks, energy drinks, and juices.
While FIZZ’s brands are, at least regionally, popular, the company is facing declines on both the top and bottom lines of the earnings statements. For Q3 2019, the company reported EPS of 53 cents. This was 35 cents lower than the year-ago quarter, or a 39% drop. The gross revenue number was also bad, falling 3% from $227.5 million to the current value of $220.8 million.
Commenting on the sharp drops in the quarterly results, CEO Nick Caporella said simply, “We are truly sorry for these results stated above.” He went on to add, “[G]ross margins were impacted by volume declines. Comparisons were further skewed by the adoption of the new tax act in the third quarter of the prior year…”
So, despite annual revenues exceeding $1 billion, FIZZ is in trouble. The company is struggling with low margins combined with difficulties managing and promoting brands. The La Croix brand, in particular, has been the subject of lawsuits alleging that it does not use “all natural” flavoring as advertised.
Branding troubles and competition are on the minds of Wall Street’s analysts when they look at FIZZ. Laurent Grandet, of Guggenheim, writes, “We are revising our expectations for National Beverage ahead of [fiscal] 2Q results expected in early December… we are now incorporating our estimated impact of the upcoming AHA brand launch in March 2020 that we expect will take shelf space and share from LaCroix. We continue to think LaCroix will not stabilize until at least next year...” Grandet reiterates her Sell rating on the stock, and lowers her price target to $31, indicating a downside of 36%. (To watch Grandet’s track record, click here.)
Jefferies analyst Kevin Grundy is even more concise in his hard-edged review of FIZZ. He states simply, “Competition has intensified in the sparkling water space and we still do not foresee a quick, inexpensive, or even certain turnaround for the co.'s LaCroix brand.” Grundy also places a Sell on FIZZ, with a $32 price target that implies a 34% downside risk. (To watch Grundy’s track record, click here.)
All told, FIZZ is rated a Moderate Sell by the analyst consensus. The three most recent ratings on the stock are 2 Sells and 1 Hold, indicating a bearish mood among analysts. The company’s branding and image problems are far from over, and Wall Street sees that continuing to impact sales. Shares are priced at $49.53, and the average price target of $35 suggests a downside of nearly 30%. (See National Beverage's stock analysis on TipRanks)