Leg Down Likely - 4 Stocks That Would Get Hurt The Most

by: David White

The US Congress “Super Committee” is supposed to agree on a package of measures to decrease the US budget deficit by $1.5T by Nov. 23, 2011. These measures are widely expected to be largely spending cuts. There has been no agreement so far, and the deadline is approaching quickly. Failure to reach an agreement will trigger automatic across-the-board spending cuts from January 2013. Failure to reach an agreement could trigger further rating agency downgrades of US debt.

With just two days to go, many are now expecting this failure. This is on top of the EU credit crisis, which is showing signs of spiraling into an EU wide recession. Many think such a recession will negatively affect the US, China, Japan, etc. A more certain expectation of this is likely to mean another leg down in the equities markets in the near term.

Virtually all stocks will get hurt by this, but some will get hurt more than others. Cyclical high Beta stocks with low profit margins and high debt loads seem likely to be among the worst hit. Many of these have been showing growth and recovery, but this situation will likely be turned on its ear with an EU recession and damage to the US, Chinese, Japanese, etc. economies. Many of the companies fitting the above description already have high P/Es. Their stock prices have moved up in expectation of improving profits. Now they can move down easily.

A few of the companies that meet this description are: Marriott International Inc. (NYSE:MAR), Dunkin’ Brands Group Inc. (NASDAQ:DNKN), Commercial Vehicle Group Inc. (NASDAQ:CVGI), and Virgin Media Inc. (NASDAQ:VMED). Brief descriptions of each company are in the paragraphs below. The data are mostly from TDameritrade and Yahoo Finance.

Marriott International Inc. (MAR) has a Beta of +1.4. It carries a debt/capital ratio of 87.83% with a net profit margin of only +1.88%. Even in a decent economic environment last quarter, it suffered a -3.30% revenue loss. It is trading at a P/E of 51 on expectations of future improvements in earnings. With an EU recession, etc. those expectations are being and will continue to be cut back. MAR operates and franchises hotels and related lodging facility worldwide. It develops, operates, markets, and sells timeshares, although it is in the process of spinning this business off.

It provides furnished corporate apartments and temporary housing for business executives. As of June 17, 2011, it operated or franchised 3,661 lodging properties with 633,704 rooms, including 3,774 units of home and condominium products. It will suffer when the EU suffers. Tourists will put off plans until a better economic time. If the EU trouble spreads, MAR will suffer even more. It is only now just beginning to recover from the last recession. The new recession in the EU (at the very least) will send it into another tailspin.

Dunkin’ Brands Group Inc. (DNKN) has no Beta given. It carries a debt/capital ratio of 67.06% with a net profit margin of only 1.25%. It suffered a -59.31% earnings per share decline in its most recent quarter. It is trading at a P/E of 47 on expectations of good growth. However, the CAPS community disagrees with the brokerage analysts. CAPS gives it a one star rating (the worst). Many are looking for a decline in the Baskin Robbins subsidiary’s business in the US over time even without an economic downturn. Many think Dunkin’ Donuts’ coffee offerings are not competitive with Starbucks (NASDAQ:SBUX) or even McDonald’s (NYSE:MCD) offerings. With an economic downturn, this company should get hurt significantly. It owns, operates, and franchises quick service restaurants worldwide.

Commercial Vehicle Group Inc. (CVGI) has a Beta of +3.6. With a Beta this high it should move down quickly with the market almost regardless of the fundamentals. However, it has some fundamental problems too. It carries a debt/capital ratio of 96.33% (almost under water); and it has a net profit margin of only 1.63%. Its P/E is not extraordinary at 23.26. However, this is just the kind of stock that will get hurt in a downturn. It designs and manufactures integrated system solutions for the commercial vehicle markets worldwide. It offers seats and seating systems, including mechanical and air suspension seats, static seats, bus seats, heavy truck seats, and construction and other commercial vehicle seats, etc.

In general, it offers the types of systems seen in the cabs of big trucks/vehicles including HVAC. To me this means it should be even more cyclical than the big equipment makers. There will be less replacement business. Plus the large vehicle business will slow. How many US cities will buy buses in a downturn year? How many EU cities will? How many will upgrade their existing fleets? Not many. The analysts still love this one as it has a average analysts’ recommendation of 1.7. However, I would get out of it if I was in it. Plus, I would tend to try to ride it down short term with the market.

The Beta of +3.6 should mean a rout on a market downturn. Plus, the high analysts’ recommendation leaves a lot of room for downgrades. If the economic situation sours appreciably, which seems likely, I don’t see how business can improve for this company. Rather, it should worsen. Again, this is another stock in which the CAPS community disagrees with the brokerage analysts. The CAPS community gives it only one star -- the worst rating.

Virgin Media Inc. (VMED) has a Beta of +1.6. It has a debt/capital ratio of 87.56%. It has a net profit margin of only 1.61%. Yet, it sports a P/E of 79. This seems far too highly valued for a troubled economic environment. VMED provides entertainment and communications services in the UK. It offers cable broadband internet, television, and fixed line telephone services through Virgin Media brand to residential customers; mobile telephony services through Virgin Mobile, a mobile virtual network operator; broadband and telephone services to residential customers through third party telecommunications networks; and video on demand and high definition television services. The company also operates a Web portal, virgin media.com, which offers music, games, movies, and television programming. It operates an online gaming channel. It rents digital video recorders.

Additionally, it provides voice, data, and internet solutions to commercial customers, including analog telephony and managed data networks and applications. It supplies communications services to health and emergency services providers. I could go on. Still, the point is that all of these will be susceptible to an economic downturn in the UK, which is virtually assured at this point. On top of that, Google (NASDAQ:GOOG) is rumored to be getting into this business. If it did so in the UK, which seems a natural fit, Google would provide considerable competition for VMED. There is speculation that Google could eventually use YouTube as a selection service for a virtual cable TV service.

Again, the CAPS community has given this stock its lowest rating of one star, while the brokerage analysts still rate it 2.2 (a buy). To me there seems lots of room for downgrades. Such actions would tend to make the stock move down even further.

In the current economic environment, especially with the near term negative market outlook, all of these stocks look like reasonable shorts. Please do further investigation yourselves.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MAR, DNKN, CVGI, VMED over the next 72 hours.