The S&P 500 has posted a 10.31% gain since the beginning of the fourth quarter in 2012, and about 8.9% gain year-to-date in 2013. Last year we had discussed several reasons for expecting a solid fourth quarter and also why 2013 would be a bullish year, and I believe that in the long run, those factors continue to make a case for an extended run in most major indices. However, it is important that investors continue to take profits when they can, especially if a company has provided a soft outlook or disappointing earnings, or both.
In this wild rally, there are stocks that were able to ride the wave in spite of having average outlook for the coming year or showing unimpressive earnings performance. In this article, we discuss three such stocks -- they have appreciated considerably in the past thirteen weeks, are trading close to 52-week highs, have a low buy-sell analyst rating ratio (that is, more number of sell ratings) and have several headwinds or risks ahead of them.
(1) COMPASS MINERALS INTERNATIONAL INC. (CMP)
Compass Minerals produces rock salt, trade salt and sulfate of potash (used in fertilizers). Its salt business caters to various applications, such as road construction (largely used in highway de-icing), food applications, as well as water treatment. Its sulfate business is largely focused on the North American region, and 24% of 2012 revenues came from this segment with the remaining sales coming from the salt business.
Key Facts for Compass Minerals
Main Headwinds For Compass Minerals
- Inventory oversupply, reduced demand for de-icing business, disrupting weather conditions, higher per-unit costs in both segments are the main headwinds.
- During its February 2013 earnings call for Q4 2012, Compass Minerals disclosed that weather conditions in recent times had increased their operating costs and resulted in an inventory oversupply problem.
- The wet weather increased their per-unit production costs in both segments.
- Mild winter weather in the past two years have affected the demand of their salt products required in the highway de-icing business.
- EPS growth in the past four quarters (or trailing twelve months) has been a disastrous -40%. Sales growth in this same period has been negative as well (-14%). If you consider the long term EPS growth in the past five years, it has been a modest 1.7%.
(2) EATON VANCE CORP (EV)
Eaton Vance is an investment management company that creates and manages mutual funds and provides financial consulting services to individuals and corporations. It works through a bunch of sister companies such as Atlanta Capital Management (Eaton has 70% ownership), Parametric Portfolio Associates (80% stake) and Fox Asset Management (80% ownership).
Key Facts For Eaton Vance
Main Headwinds For Eaton Vance
- In its February 2013 earnings call, the company cited significant reduction in its overall effective fee rate as well as investment counseling and administrative fee rate.
- Expenses related to compensation and other operating expenses (such as distribution/marketing expense) have been increasing lately (7% year-over-year in recent quarters). Compensation expense actually increased by 13% on a quarter-over-quarter basis. The company's effective tax rate for Q1 2013 increased from 34.1% to 37.9%. Therefore, operating income fell by $5.6 million on a quarter-over-quarter basis.
- Stock funds in-flows are likely to be affected due to disappointing performance in the past three years compared to the market's peer funds.
- Eaton's fee based income has been decreasing, also because it has been selling lesser Class B type shares that carry a commission that cannot be waived under broker type arrangements.
(3) SAFEWAY INC. (SWY)
Safeway is a major North American grocery / retailer company, with a large network of stores as well as facilities engaged in distributing, manufacturing and food processing. Safeway has shown the best performance in the past 13 weeks, compared to both the S&P 500 as well as the other stocks mentioned here.
Key Facts For Safeway
Main Headwinds for Safeway
- Food inflation in 2013 is projected to increase year-over-year to 3%-4% in 2013 compared to 2.5%-3.5% in 2012, according to the U.S. Department of Agriculture. This will directly impact consumer spending at the retailer stores, thus affecting their volumes.
- In a recent investor's conference held in March 2013, the company disclosed that capital expenditures will be higher in 2013.
Compass Minerals, Eaton Vance and Safeway are all trading close to their 52-week highs, and have overall more sell ratings by major analysts in the Wall Street. These stocks have outperformed the S&P 500 and most other indices if you consider the 52-week timeframe, and have provided a relatively soft outlook for either the remainder of the year or at least the next quarter.
None of these stocks are outright short candidates in my opinion. The call here is to ring the register if you are in this play and get out with profits. With the S&P 500 already close to record highs, investors should consider taking profits in these stocks and move on to either defensive plays or stocks that appear more favorable to analysts, have low valuations and are forecasting a solid annual earnings growth in the next couple of years (we recently discussed some low-priced stocks in this article).
Taking profits at the right time is important because even for long term investors, it is said that the "bulls make money, bears make money, and hogs get slaughtered".