Europe's seemingly endless debt crisis is driving markets lower around the world. Bank runs, recapitalization plans, major government deficits, consumers and businesses retrenching, are all eerily familiar issues that created a huge financial collapse in 2008-2009. More and more, it looks like continued failures by European leaders to stop the downward spiral could drive the weak U.S. economy back into recession and possibly create a significant correction in the markets. The United States is also facing major debt and "fiscal cliff" issues which could create a market drop later this year. While many stocks have already seen a substantial decline, what we have seen so far is nothing like the lows that were registered at the height of the financial crisis. It's a good time to check portfolios for areas of possible weakness and one way to do this is by looking up historical data to see how certain stocks held up when investors were running for cover. Before I commit new capital to any stock at this time, I am checking to see just how the shares held up in the last financial crisis. It is also very important to check the balance sheet strength because debt-laden companies are likely to see sharper drops in the share price. Here are a few stocks that investors should consider being wary of now, based on the weakness displayed during the last financial crisis. These stocks were not safe for investors to hold or buy on the way down then, and that might be a good reason to avoid these names now. Conversely, it could make sense to watch these stocks and considering buying, if these names drop sharply in another Lehman-like meltdown over the European debt crisis, a possible Greek exit from the Eurozone, contagion potential and U.S. fiscal cliff issues:
Freeport-McMoRan Copper and Gold (FCX) was trading for about $61 per share in June 2008, before the crisis. It was not a good stock to own during the meltdown and on the week of December 1, 2008, Freeport shares traded at just $8.40 per share. The company is a producer of gold and copper, and since copper demand is driven lower in a weak economy, that side of the business looked troubled. Back in 2008, the company carried considerably more debt on the balance sheet which obviously spooked many investors. It is important to note that Freeport has a much stronger balance sheet today with about $4.5 billion in cash and around $3.5 billion in debt. Because of this, a decline as sharp as the one seen in 2008 seems very unlikely, however the stock could still display major weakness if Europe drives the global economy off-track. The shares have been in a downtrend ever since February when it traded around $46.
Here are some key points for FCX:
Current share price: $33.83
The 52 week range is $28.85 to $56.78
Earnings estimates for 2012: $4.02 per share
Earnings estimates for 2013: $5.22 per share
Annual dividend: $1.25 per share which yields 3.7%
Royal Caribbean Cruises (RCL) shares were trading around $42 in January, 2008, but by November, the stock was just about $6.62 per share. It seems that investors were concerned about a potential depression, which would be a very tough environment for a cruise line's survival. Thanks to massive stimulus, interest rate cuts and other programs, the worst case scenario did not play out....yet. However, some darks clouds are looming with investors focusing increasingly on the "fiscal cliff" facing the United States later this year due in part to the debt created by stimulus spending. The European debt crisis is already probably affecting cruise bookings from European tourists as the weak economy there starts to hit almost every country and reduce consumer confidence and spending. The balance sheet is cause for concern in a recession because Royal Caribbean has just about $277 million in cash and around $8.5 billion in debt. This is a leveraged balance sheet that could pose problems in the future. This could explain why the shares have dropped from about $30 just a couple months ago, down to about $23. Even after the recent drop, this stock is still trading for about 12 times earnings which is right around the average for a stock in the S&P 500 Index. That is not low enough for these shares to be considered a bargain, especially when considering the balance sheet issues. Furthermore, the earnings estimates could be too high considering the impact of Carnival Cruise Lines (CCL) Costa Concordia incident and the signs of global economic weakness that seem to be gathering momentum.
Here are some key points for RCL:
Current share price: $24.24
The 52 week range is $18.70 to $39.43
Earnings estimates for 2012: $2.01 per share
Earnings estimates for 2013: $2.66 per share
Annual dividend: 40 cents per share which yields about 1.7%
General Electric Company (GE) shares plunged during the week of March 2, 2009, to just $7.06. This company has a number of economically sensitive businesses, and it also has heavy exposure to the financial industry. In addition, General Electric's balance sheet could be cause for concern, especially in a major economic slump. It has about $83.6 billion in cash on the balance sheet and $442.8 billion in debt. In a severe downturn, this level of debt becomes a much more serious concern for investors. Since the company carries a high debt load and remains heavily concentrated in financial services, and economically sensitive industries, this stock could be prone to another sharp drop. Many investors are attracted to the shares because the company has a blue chip image and a dividend yield of about 3.6%. However, the dividend and the image did not stop this stock from plunging in the last financial crisis and with a significant level of debt that vastly outweighs the cash on the balance sheet, it creates doubt as to whether that blue chip image is even appropriate. In December, the shares were trading at about $16, then rallied over $20, and recently dropped close to $18, as the markets corrected. With a price to earnings ratio of about 13, it now trades around the market average, which hardly makes the shares a bargain. Due to the heavy exposure to the financial and industrial sector, and because of the high debt load, I believe this stock should trade at a lower than average multiple. In my view, "real" blue chip companies have more cash than debt, and investors might regret buying into GE shares for the dividend yield, if the economic situation deteriorates further. In a market drop and weak global economy, both earnings estimates and PE multiples decline, and that combination could drive GE shares sharply lower.
Here are some key points for GE:
Current share price: $19.20
The 52 week range is $14.02 to $21
Earnings estimates for 2012: $1.55 per share
Earnings estimates for 2013: $1.76 per share
Annual dividend: 68 cents per share which yields about 3.6%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.