Regular contributor Sy Harding weighs in this week with three stocks that he believes have seen their tops for a little while…
Three Stocks to Avoid
Being Street Smart
January 28, 2011
I’m not saying sell them short, but here are three popular stocks I sure would neither buy nor hold at this point. They’ve had good runs, but are looking toppy on our technical charts and on their valuations and fundamentals.
Amazon (AMZN) is an amazing success story, one of the few dotcoms that not only survived the bursting of the dotcom bubble in 1999, when its stock lost 95% of its value, but recovered and has prospered.
However, the stock is now selling at a bubbly 72 times earnings, with clouds on its horizon.
Amazon has become by far the world’s largest online retailer. That by itself can be a problem. With 24,000 employees and sales of $34 billion, it will become increasingly difficult to post earnings growth at the pace investors have come to expect.
In addition, whereas previously almost all the company’s revenues came from media products (books, music, movies, and video games), in order to keep top-line growth growing the company has had to move further into sales of lower-margin general merchandise, which now accounts for almost 50% of sales.
The problem could be seen in the company’s fourth quarter earnings report this week. Amazon experienced an impressive 36% increase in sales over the same period last year, thanks in good part to its acquisition of Zappos and hot sales of its Kindle e-reader. But earnings rose only 7% as profit margins declined. The culprit was the 71% increase in lower-margin general merchandise sales, and only a 13% increase in media-related sales.
Amazon’s Kindle e-reader was innovative and is a winner, but it faces significant competition going forward from Barnes & Noble’s Nook e-reader and Apple’s iPad, among others.
Meanwhile, most of the company’s attempts to broaden out beyond retailing, including search engines, online auctions, and video-on-demand have failed.
Selling at 72 times earnings, compared to the price/earnings ratio of 18 on the S&P 500 looks to me like a lower stock price ahead for Amazon.
And then there is Autozone (AZO), the large chain of auto-parts stores.
The company’s stock has more than tripled since its low in 2008, as the company took advantage of the serious recession and plunge in new car sales that had consumers and auto mechanics buying more parts to keep existing autos going. With the economic recovery underway and surging new car sales expected to make up for lost time over the next two years, that sweet spot in the economy for Autozone is behind it.
The company’s insiders seem to agree. Thomson Financial reports that 30 insiders sold into the rising stock price over the last six months, while there was no insider buying.
I expect Autozone shares have also seen their peak for awhile.
And then there is Altria (MO), parent company of Phillip Morris. Altria sold off its non-tobacco and international divisions, including Kraft Foods and Philip Morris International, over the last three years. That leaves it focused on the U.S. tobacco market, where it controls 49% of the retail cigarette market with its Marlboro, Virginia Slims, and Parliament brands, and 54.5% of the much smaller smokeless tobacco market with its Skoal and Copenhagen brands.
This week the company reported December quarter earnings of 44 cents a share, a 27% increase over the same period a year ago. The company also announced a $1 billion, one-year stock re-purchase plan.
However, as was the case in its third quarter, Altria’s profit improvement in the fourth quarter was the result of raising prices and cutting costs. That’s not a formula that can continue for long. Bare-bones costs can only be cut so much. Prices can only be raised so far before affecting sales.
Meanwhile, overall cigarette sales in the U.S. remain in a long-term decline, pressured by health concerns and tight advertising regulations. Altria’s price increases make lower-priced brands, like Pall Mall from Reynolds-American, and Maverick from Lorillard, to say nothing of discount cigarette brands, more attractive to smokers who haven’t yet kicked the habit.
Altria improved its situation with the acquisition of smokeless tobacco maker USD in early 2009, bringing USD brands Skoal and Copenhagen under its banner. Sales of smokeless tobacco, both ‘moist snuff’ and chewing tobacco, have been increasing as a substitute for those who have quit smoking but have not overcome their addiction to nicotine.
However, authorities are now targeting smokeless tobacco. The Family Smoking Prevention and Tobacco Control Act of October, 2009, gave the Food and Drug Administration (FDA) power to regulate smokeless tobacco products. Already health warning publicity regarding smokeless tobacco is becoming more prominent, and advertising restrictions are being implemented. Not only do those pressures create a more difficult sales environment for Altria, but the publicity regarding health risks also increases the potential for lawsuits.
Altria’s 6% dividend yield has made its stock attractive in these times of low interest rates. But that will not likely be enough to prevent investors from moving on to greener pastures.
Three stocks that have served investors well as profitable investments but should, in my opinion, now be avoided.