by Michael Williams
Picking winners is always more glamorous than finding losers, but both have a positive effect on a stock portfolio. Avoiding investments in companies that are struggling can help traders avoid bleeding off the profits they earn elsewhere. Such can be said for investors who resist the temptation to buy stock in besieged companies like Nabors Industries (NBR), Coventry Health Care (CVH), CarMax (KMX), Novellus Systems (NVLS) and Owens-Illinois (OI). In this article, I will discuss why I believe you should avoid these five stocks at this time based on negative impacts from recent earnings, management, investigations, and overall profitability.
Bermuda-based Nabors Industries Ltd is an on-land drilling company that operates worldwide. The company also takes part in oil & gas exploration and production in the United States, Canada, and Colombia. Shares in this $5.7 billion company are trading around $20, just below the midpoint of its 52-week range at $11.05 - $32.47. The company does not pay a dividend, but it has a one-year target of $25.75.
There are a number of reasons to avoid purchasing Nabors Industries, and they start at the top. Company Chairman Eugene Isenberg was forced to forego a $100 million payment upon his retirement. This amount would have been on top of nearly $109 million that he had received in the past three year, a move which has prompted a Securities and Exchange Commission investigation of Nabors. On top of that, the company reported no quarterly earnings, has a miserable debt to equity ratio of 76, a terrible beta of 2.29 and a levered free cash flow of -500 million. In short, apparent mismanagement has left Nabors Industries as a great stock to avoid.
The health care industry is widely regarded as a business sector with great potential for investors. That optimism isn't currently helping Coventry Health Care, a Bethesda, Md.-based managed-care company that also provides health plan commercial risk, Medicare advantage, and Medicaid products. Trading around $30.50 per share, the stock price had tumbled nearly 5% since the beginning of November 2011, and analysts are expecting a reported 33% drop in earnings year-to-year.
An anemic 7.45 price to earnings ration is doing nothing to reinforce the company's ability to create some excitement on Wall Street in the months ahead. The share price is trading below its 200-day moving average, something it has done consistently since July of last year. Coventry has a cumbersome total debt to equity ratio of over 40, and its beta of 1.51 indicates that it is clearly struggling. With no dividends and a price to book value of 1.0, there is little indication of Coventry investors realizing a profit this year.
Founded in 1993, CarMax has specialized in selling and financing used automobiles. The company excelled with the no-haggle pricing concept; however, it suffered as potential customers held on to the cars they own instead of buying during the economic crisis. With a 52-week range of $22.77 - $37.02, the current $30 share price of CarMax is close to its midpoint. The stock has a one-year target of $32 and CarMax does not pay annual dividends.
Although the company has a price to earnings ratio of 17 and recorded a quarterly revenue gain of 6.8%, CarMax only managed 0.5% earnings growth year-to-year. Much of this weakness has to do with its $4.5 billion in total debt, which pushes its debt to equity ratio to an investment-killing 170. With a price to book ratio nearing 3:1 and a 13% decline in share price over the past year, investors would be wise not to trade in any other stocks they are holding in order to test drive CarMax.
Located in San Jose, CA, Novellus Systems Inc is a manufacturer of the equipment used in making integrated circuits for the electronics industry. Operating in a competitive environment that is dominated by companies like Intel (INTC) and overseas competition from Japan and China, the company has struggled to maintain its position as a profitable company. Currently trading at $48 per share, Novellus does not pay dividends, and its stock is trading near the top of its 52-week range of $25.95 - $49.92. The stock's one-year target of $47 suggests that it doesn't have the legs to continue its current upward trend.
Novellus' stock was recently downgraded to "Neutral" by DA Davidson, a move that seems to be supported by its 26.4% decline in quarterly revenue, 52.8% decay in year-to-year earnings, and an uncomfortable debt to equity ratio of 34. With a price to book value of almost 3:1, Novellus does not seem to have the spark to make a strong comeback this year.
Operating in the consumer goods sector as a manufacturer of glass containers, Perrysburg, OH-based Owens-Illinois is a key supplier to beer, soft drink and pharmaceutical manufacturers worldwide. At $24.50 per share, the stock is trading slightly above the midpoint of its 52-week range of $13.43 - $33.32. The stock has one-year estimates as low as $24 and it the company does not pay dividends.
Although Owens-Illinois enjoyed a quarterly revenue increase of 5.2%, it experienced a net income loss of over $500 million. The company is struggling with more than $4 billion in total debt, leading to a staggering debt to equity ratio of 406. With a price to book ratio that is approaching 5.0, investors would be wise to consider purchasing stock in a competitor like Silgan Holdings Inc (SLGN), a company that pays a $0.44 annual dividend and realized a quarterly earnings growth of over 125%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.