Avoid these stocks that the market hates

 

One of the most tempting, and risky, approaches to investing to look for beaten up stocks and try to buy while shares are weak in hope of a quick bounce. In some cases, this strategy can lead to quick gains, but more often than not the exact opposite outcome occurs.

The reason why this approach is so risky is that weak stocks are usually weak for a good reason. And typically it takes a long time for a company to correct whatever problem the market sees in the company’s underlying business.

This is obviously not always the case. Consider social media leader Facebook (FB). Earlier this year the stock took a big hit on its recent data scandal, but the stock quickly found its footing and erased its losses as the market realized it had overreacted to the news, and that the long-term outlook was not much different for the stock than it was prior to the scandal.

This is a case where buying into weakness would have paid off, but this is not typical. It is hard to “catch a falling knife”, and you are usually better off looking for strong stocks that have the potential to build on their recent gains.

If you are tempted to put some money to work in weak stocks, make sure to limit your exposure, and never invest more than you are willing to lose. Given the recent market volatility, there are some high-quality stocks that have sold off more than they should have in recent months, but here are five stocks that the market hates which you should probably avoid investing in at this time.

Sears Holding

Sears Holding (SHLD) is a household name, which unfortunately is in serious danger of going under. The company has failed to adapt to the changing retail space, and has been forced to sell off some of its best brands in order to stay afloat. The stock is trading under $2.50 a share, which makes it tempting for investors that are willing to roll the dice on the company returning to its former glory, but the outlook is incredibly bleak for Sears, which could easily be the next company to fall under the pressure of Amazon (AMZN) and other companies that have managed to grow their online businesses over the years. Sears is a huge gamble, and investors would be wise to look elsewhere for a beaten up stock to gamble on.

Chart courtesy of www.stockcharts.com

Overstock.com

One of the biggest disappointments this year has been online retailer Overstock.com (OSTK). The stock had a meteoric run in 2017 in reaction to the staggering gains in cryptocurrencies, but as cryptos fell, so did the stock, which is currently down 42% on the year. Overstock was the first major online retailer to start accepting bitcoins, so it was reasonable for the stock to skyrocket when bitcoin climbed to around $20,000 late last year, but bitcoin has fallen to around $6,400 and has been stuck in a sideways pattern for months. The volatility coming out of bitcoin is actually a good thing long-term for the cryptocurrency, but it also means that Overstock is going to struggle to make back its recent losses. If we start to see the level of mania return to cryptos that we saw last year, then it will make sense to jump back into this beaten up stock, but for better or worse the stock is now tied to bitcoin, and there is simply too much uncertainty at this point to gamble on a big recovery for the stock.

Chart courtesy of www.stockcharts.com

Dish Network

Satellite TV company Dish Network (DISH) has trended steadily lower over the last twelve months. DISH is currently trying to bounce off its 52-week low, but until the company is able to turn things around and return to earnings growth there is little reason to bank on the stock making a meaningful move higher. Next year the company is expected to endure a 15.1% drop in earnings, and over the next five years profits are expected to fall by 9.7% per annum. The primary thing Wall Street wants to see in stocks is growth, and with earnings forecast to drop so much over the next five years it will be very difficult for DISH to move much higher.

Chart courtesy of www.stockcharts.com

American Air Lines

Airliner American Air Lines (AAL) has greatly underperformed the market in 2018. Rising oil prices have weighed on the stock, which is currently down a bit over 25% on the year. Like all transportation stocks, oil is a big cost component for American Air Lines, and with oil remaining strong, there is no reason to expect shares of AAL to make a quick recovery from its recent sell off. Oil remains near $75 a barrel, and until we see crude prices start to ease AAL and other transportation stocks will continue to be under pressure.

Chart courtesy of www.stockcharts.com

Goodyear Tire

Goodyear Tire (GT) has had a tough 2018, with shares currently down 27% year to date. The stock has an attractive forward P/E of just 5.7, but earnings growth is fairly muted, with analysts expecting profits to rise by just 6.4% per annum over the next five years. The company’s most recent report came in late-April, with the company topping estimates for the bottom line, but reporting weaker than expected sales numbers. While earnings were better than expected, they were down sharply year over year from $0.74 per share to $0.50. Sales have been weaker than expected six of the last eight quarters, and until the company is able to turn that around and start to top estimates for sales, it will be tough for the stock to claw back its recent losses. The big profit drop was attributed to rising input costs, and those higher costs will continue to weigh on the company’s profits, and the stock’s price for the foreseeable future.

Chart courtesy of www.stockcharts.com

Symbols: AAL DISH GT OSTK SHLD
Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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