Among the biggest mistakes we make as investors is to fall in love with stocks, buying them with both hands when their best days are behind them, or refusing to sell despite their obvious flaws.
There is great wisdom in the crowds here at Seeking Alpha, but there can also be risk, when love for a stock becomes general and its record or prospects are ignored. So I've taken the comments of the last few years at my own articles, and come up with a list of some overly-loved stocks, to be followed by a list of overly-hated ones. And I'm speculating as to the reasons for both.
First, where is there too much love?
IBM (NYSE:IBM) pops immediately to mind. When I point out that it's down 10% over the last year, or that annual sales have been falling every year since 2011, you can be certain there will be enormous pushback.
But IBM has a monopoly on mainframes. But IBM has cutting edge research. But IBM is going to dominate the cloud, and the Internet of Things. But IBM yields 3.11%, and has increased the dividend steadily for years.
All true. But IBM is eating its seed corn, putting an increasing amount of quarterly profit into shareholders' hands, rather than back into the business. Its financial engineering has hidden the rot, cutting the float to make the company seem to be doing better than it is.
IBM is not gaining enough in the cloud to make up for losses in other areas. Its dominance of client-server technology is a boat anchor that is sinking it. It's led by marketing people rather than technologists. But no matter how patiently I explain all this, its fans continue to mock.
GE (NYSE:GE) is a company where I've been guilty of too much love myself. I loved CEO Jeff Immelt's concept of building an industrial giant to replace the financial company of Jack Welch. But it continues to go nowhere, up only .4% over the last year while the S&P is up 7.4%.
GE is basically stuck in neutral. Sales were $146 billion in 2011, with $13 billion in profit. They were $148 billion in 2014 with $15.2 billion in profit. Meanwhile the financial operations, which acted as lubrication, smoothing over problems in other markets, are being jettisoned steadily. The company is going to be getting creaky knees unless industrial markets take off.
Can they? GE has its hands in all forms of energy, not just wind and solar but oil and tar sands. The company is huge in health care, but can it continue making big deals without financing?
What you're buying with GE, today, are an old man's dreams. Jeff Immelt turns 60 next year, he's going to retire, and someone else is going to have the power to completely overhaul this company, once again, as he did.
Costco (NASDAQ:COST) is a stock I hold in my own portfolio, but should not. Since I bought it a few years ago it's up by one-third, it pays a steady dividend, and it's a fine operator, without the labor trouble of other big retailers like Wal-Mart (NYSE:WMT).
But this should not blind investors to trouble ahead. The shares are down so far this year. Its special dividend of $5/share is in the past. Sales growth of $7 billion/year now means a gain of less than 7%, and it's down from the $11 billion top-line gain of 2011-2012.
Costco's giant stores, built to serve upper-income cars with SUVs, may prove anachronistic to Millenials who have moved to smaller city homes and get around on mass transit. Its online operation is not first-rate, and it may be exhausting its market's appetite for growth.
Wells Fargo (NYSE:WFC) is my favorite bank by far, and CEO John Stumpf my favorite banker. Since the financial crisis the shares have more than doubled, and the dividend has gone from 5 cents/share to 35. The company has a stellar reputation, a huge branch network, and its trading operations make boatloads of cash.
But what has Wells done for you lately? It's up only 3% so far this year, half the gain of rival JP Morgan (NYSE:JPM). Net income is no longer rising as it did a few years ago, up less than $1 billion from 2013-2014, and basically flat since the first quarter of 2014.
This is the thing about companies we love too much. They've done well, for themselves and for us. But there is a limit to "good," and if you don't see that ahead you can miss the chance to make good money.
AT&T (NYSE:T) has an enormous yield, it has a duopoly in mobile telephony, and it even has some growth - sales rose $6.5 billion over the last four years, and came in at $132 billion last year. It's like a great ocean liner that carries its passengers along in luxury, delivering 5.44% in dividends if you buy a ticket now.
But AT&T has an enormous wireline network, covering half the country, withering away steadily. It can't upgrade that network to the speeds cable can deliver. So it is buying DirecTv (NYSE:DTV), which is lagging cable and facing the same cable-cutting problems cable does.
The duopoly is threatened by both Washington, which wants to cut the amount of spectrum the company can buy in continuing auctions, and by hard-charging competitors like T-Mobile (NASDAQ:TMUS), which are grabbing share. Its iPhone success of early this decade will not be repeated.
But if I warn you about these problems I will be rebuffed. The passengers are comfortable with their income, which they can live on well. They see no icebergs ahead, no reefs. When trouble occurs they will be as shocked as can be.
It's complacency that causes managements to falter, and complacency that causes portfolios to falter. I recommend you look at your holdings regularly, and that you be prepared to run, not walk, to the exits when performance falters.
If you want love, get a dog.
Disclosure: The author is long WFC, COST.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.