Remember this chart from 2005 to 2007? It is what the S&P 500 (SPY) looked like then:
And here is what the S&P 500 (VOO) has looked like the past 3 years:
Here is the S&P 500 Cyclically Adjusted Price-Earnings Ratio or CAPE:
In the S&P 500 today are dozens of stocks that are very overvalued against future earnings expectations. And in many cases, those expectations are too high to begin with, hence the CAPE ratio which takes into account earnings over a full cycle.
So, I've decided today to lay out "the 12 sells of Christmas," primarily using charts because sometimes a picture is worth a thousand or million words, or at least a few bucks. I'll toss in a summary bear thesis as well.
Most of these companies are very loved by investors. Many will scream "buy and hold forever" after each name. I'm sorry, if I know something is likely to drop over 20% and possibly more, I'm a seller.
Very few people are actually in a position to hold through a big correction like the ones we had from 2000-2002 and 2008-09. For those who can, bully for you. If you can't stand the pain of likely losing 20-30% or more of your money on these stocks and the several years it will take to make the money back, then you should either sell, or at least take your profits off the table from the past few years and hold some cash.
As I'll discuss in my upcoming article "The Futility of Forecasts & My Forecast for 2018" I believe we are at or near the inflection point that leads us to a recession (or two) and a bear market (or two). If you need to preserve your wealth, now is a good time to start that process.
In order to manage healthcare costs in America, Congress will have to more fully address the out of control costs of the system. Pharma will feel the heat soon in my opinion, as this is a political winner for many Congress people.
Eli Lilly (LLY) has risen almost three fold since the financial crisis which hasn't even beaten the S&P 500. Over the past two years the company has been chopping along and could be setting up for a correction on positive business catalysts that don't materialize or possibly actions by Congress eventually.
Lilly has a trailing P/E of 41 which is high by any standard. Unless they offer a breakthrough profit machine pill, Lilly appears headed for a correction.
Pfizer (PFE) is probably the strongest of these three companies, but also a sell in my opinion after the long consistent ascent. The abbreviated short thesis is that patent expirations will be hard to overcome in the next several years, especially the Viagra expansion. I gave a more detailed look at Pfizer here.
Pfizer currently has a trailing P/E of 22 which indicates an optimistic growth outlook. I think that growth outlook will be disappointed.
Technically the stock looks mediocre. The RSI is coming off an overbought situation and the money flow is turning down, which indicates less and less new money interested in buying the stock. The fourth leg in my Core 4 Investment Process is price trend analysis using technical and quantitative factors, from this point of view, Pfizer looks to be weakening.
Bristol-Myers Squibb (BMY) has a fairly diversified asset mix that supports the business, but is not exciting in any way in my opinion. The company is trying to fight off generic competition by putting money into R&D, but that is yielding limited results. Going forward, I believe government will be more favorable to generics and this could hurt the company. In that scenario, the company would be forced to really retrench and the markets would likely punish the stock.
The company's trailing P/E is 24 despite earnings per share growth being negative.
Technically the company is in decline and money flow just turned negative. Again, money flow indicates interest from buyers in the stock. The share price is hitting resistance for a second time from a gap down a few months earlier. If the stock can't breakout higher, there is downside to the bottom of the box on the chart.
Following on the theme that healthcare in America will need to be fixed to avoid a national financial and social catastrophe, health insurance companies are in big trouble in my opinion. The companies themselves appear to know that something negative is coming their way after the Obamacare bonanza. We have seen merger attempts typical of the end of cycles, including the recent purchase of Aetna (AET) by CVS Health (CVS).
I wrote about United Healthcare (UNH) being a sell a few months ago, only to get pilloried by "it's going to the moon" stock zealots - make sure to read the comments on that one. United's problem is that they are so big, there is no merger that can help them.
Cigna (CI) and Humana (HUM) however have each other it appears. Humana recently updated their "change of control" provisions with the SEC and seems intent on being acquired. Cigna is a natural buyer, though one analyst, Ana Gupta of Leerink Partners, suggests that Walmart (WMT) and Walgreens (WBA) could both be interested as well. This makes sense in light of the CVS and Aetna deal.
Here I'll offer one chart for all three companies. If your nose doesn't bleed, then I don't know why we look at charts. These stocks are all nearly ten-baggers from the implementation of ObamaCare. Come on, am I the only one that smells a rat?
With the Fed tightening, companies that require heavy capital investment could face debt service and financing issues soon. Also, with China slowly slowing, companies that rely on secular growth could see earnings turn over outright. Caterpillar (CAT) and Halliburton (HAL) are two companies that I anticipate will face strong headwinds in coming years.
Caterpillar has rallied on a recent bump in business. That bump is not sustainable in my opinion. While the company has done well to cut costs, the Price to Earnings ratio has screamed to over 100. Yes, over 100.
While the most recent additions to new orders support the PE for now, it is very likely that the orders were simply a positive lump. It is not unlikely that orders slow again soon. I have watched CAT and the company it acquired Bucyrus, as well as, Joy Global which was recently acquired by Kamatsu, my entire life being here in Milwaukee where they have plants. These peaks and troughs in their businesses are normal. The next phase will be the painful part. Shareholders should be taking profits and employees ought to be saving cash and paying down debt.
Halliburton has special problems because, as I have discussed, we are approaching the end of the oil age. Halliburton will never reclaim their former deepwater earnings as megaprojects are going the way of the dinosaurs that turned into the oil HAL drills for. Their merger attempt with the former Baker Hughes saddled them as well.
HAL shares trade at a trailing PE over 180. Again, not a typo. This belies the long-term trends in the industry.
Halliburton stock, unlike some others, has not had a huge run up though. Rather, it has been on a wild ride for quite some time and is now in the middle of that range. I'll bet the low-end is seen again in coming years. Technically there is no excitement for the stock and money flow is negative.
If Halliburton stock runs up, before it comes down, I will become an outright short. A run up could occur on merger speculation or a good year in the oil patch. Those good years in the oil patch are no longer forever ideas though. Eventually the market will discount the coming demand destruction for oil into share prices of services companies. I talked about the coming of EVs and the impact on oil in an interview with Cheddar TV recently.
Utilities that are heavy into coal are in big trouble. Not only do they have to spend on the smart grid evolution for transmission and distribution as more alternative energy comes online and the nation deals with energy security concerns, but they have convert away from coal en masse.
Coal producers are also at huge risk. While exports are doing alright for now, the reality is that China and India want to find a way off of coal as soon as possible for health, climate and energy security reasons.
I know that climate change deniers want to rationalize that coal will be a big deal in 15 or 20 years, but the evidence flies in their face. Coal is on the morphine drip.
Companies that are behind on the capital improvements of converting from coal to natural gas and alternatives are going to face major earnings headwinds for a long time. The poster child is FirstEnergy (FE) which could head into bankruptcy without government help. The company is slow playing the shift to alternatives and banking on coal and nuclear to save the company. I have my doubts. So does the market.
The company has been in a slow drift downward the past few years. It has sold off a bit recently, but the real tell is money flow again. There simply aren't big buyers of the stock.
The company is not profitable and has a debt to equity ratio of 3.5. It has little financial flexibility. It doesn't appear to be a viable takeover target either. If First Energy doesn't find a savior to dealing with the impending death of coal, then it'll be dealing with its death in it current corporate form. Frankly, whether it's in the next few years or the 2020s, I see a bankruptcy in First Energy's future.
Duke Energy (DUK) does not appear to be a bankruptcy risk, but it is dramatically overvalued. The company generates 37% of its electricity from coal, against the national average of 30.4% which means it has work to do. It also has a trailing PE of 28 which doesn't make sense with energy use relatively flat.
While investors might like the 4% dividend yield, that could come down dramatically in coming years along with the share price. The conversions from coal to natural gas and alternatives will require large capital investment, as will working on its transmission and distribution capabilities.
The stock has ground higher since the financial crisis, but in an era where capital might be tighter and massive investment is required, this is a stock I would sell today.
Sin will usually win, but for what is coming, maybe not anymore, or at least for awhile. I made a case against Altria (MO) here that was highly debated to say the least. I see the secular trends against the company and entry into marijuana when it happens as very expensive.
In a world that is trying to be healthier and contain healthcare costs, the company's best days are behind it in my opinion. I do not see institutional investors flooding into the stock as long-term investors either.
The stock took a header earlier this year, but has rebounded nicely on the backs of investors addicted to the past and hedge funds who have picked up shares. The stock is so dramatically overbought, that any disappointments are likely to drive the share price down. I expect disappointments in coming years.
Wynn (WYNN) is a delightfully different sinful animal. It is one of the best run casino and resort companies in the world. I love their places and their poker room on the Strip. However, valuations are valuations, and if we get a recession, Vegas and casinos in general will take it on the chin too. Especially highly levered casino and resort companies like Wynn.
Currently Wynn trades at a trailing PE of 45 which implies continued stunning growth. While I love Vegas and want to travel to resorts and casinos around the world starting imminently, the growth rates simply won't be so large as to hold up such a lofty valuation.
The cyclicality of casino growth is fairly easy to see on a long-term chart. Wynn has to deal with recessions and capital constraints just like any other business. While the tax bill might spur some additional spending, I'm a seller into strength. I'll take the other side of the bet for a while. Money flow is falling as the stock touches overbought. That tells me others are starting to see my logic.
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