Five stocks I hate

I typically write about stocks I like and believe will add value to shareholders, but this week I want to take a different approach and discuss five stocks that I hate and believe investors should avoid at all cost.

There will always be some stocks that stand out from the pack because of the strength of their business, while others stand out for the opposite reason. When looking at stocks, we have to separate our feelings for the underlying company and focus purely on the strength of the stock and the company’s business model.

Among my list of hated stocks, there are several companies that I enjoy and use, but you have to be able to look beyond your personal feelings on a company’s products or services and look at what is really going on with the underlying business.

On the other side of the coin, there are also some companies I hate whose stocks I love. Tobacco and alcohol stocks come to mind. While I hate the negative impact these companies can have on their customers, in some cases I really love the stocks.

I want to remove emotion from the equation, and discuss a group of stocks that I feel have very little chance of improving shareholder value over the next twelve to eighteen months.

Each of the following stocks has problems that are going to be tough to overcome. If you currently own shares in any of these stocks, you may want to consider taking a deeper look at what is going on with the company’s business and re-evaluate your decision to keep the stocks in your portfolio.

If you are do not have these stocks in your portfolio, I would avoid establishing any new positions until the companies have proven an ability to overcome their current obstacles and move the business in the right direction.

Twitter

Social media giant Twitter (TWTR) has been a disappointment to investors since early on its public life. The stock’s IPO got a lot of hype, but after rising sharply after going public in late-2013, the stock quickly lost ground and with the exception of few short-lived rallies, the stock has been in steady downward trend over the last two years, and is now trading just above an all-time low. The stock is currently trading at $24.46, and is below its $26 IPO price. The company is suffering from slowing user growth, and the company itself has warned that growth could be even slower in the future. Revenue has been growing at a rapid pace, but until Twitter is able to grow its user base, the stock will never make any significant gains. If Twitter can figure out a way to win over the “mass market”, user growth will accelerate and enthusiasm will return to the stock, but until user growth starts to pick up, investors would be wise to avoid the stock.

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Chart courtesy of www.stockcharts.com

GameStop

Video game retailer GameStop (GME) is a company with big problems. The general trend in video games now is a shift towards digital downloads, which is something that could eventually make game discs a thing of the past. GameStop makes its money selling both new and used games. Last quarter 33.5% of the company’s total sales were new game discs, and 24.9% were used game discs. More than one-third of its total profits were derived from selling used video games. It is a great model, as GameStop profits from selling discs and then buying them back and selling them again. It’s a great business plan as long as people are buying game discs, but as more gamers shift to digital downloads, the model starts to erode. Electronic Arts (EA) estimates that around 20% of the video-game market is now digital downloads, and until GameStop is able to improve this side of its business the stock will struggle. Instead of embracing the digital download market, GameStop has attempted to downplay their popularity. I hate the company’s denial of what is obviously taking place, and would avoid the stock until it is able to improve its presence in the digital download world.

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Chart courtesy of www.stockcharts.com

Mattel

Toy maker Mattel (MAT) may be tempting to investors right now because of its 6.0% dividend yield, but the yield should be a warning flag since it rose to that level because the stock has lost so much of its value over the last couple of years. Since hitting an all-time high in December 2013 of just over $47.50, the stock has moved steadily lower and is currently trading at just $25.75. Losing nearly half its value has resulted in a sharp increase in the stock’s yield, but I would advise against being tempted to buy the stock solely for the yield. The growing popularity of mobile and PC games has been a hurdle for all traditional toy makers, raising fears about the future for Mattel’s powerhouse brands: Barbie, Hot Wheels and Fisher Price. While Mattel’s main competitor, Hasbro (HAS), has thrived as a result of inking deals with several blockbuster movie franchises, Mattel has not been so fortunate, and this is a major problem for the company as it looks to supplement the sales it has lost to mobile and PC games. If you want to invest in a toy company, I would advise shying away from Mattel and instead focusing on Hasbro.

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Chart courtesy of www.stockcharts.com

Avon Products

It is a shame to see a company that been in business since 1886 find itself on death’s door, but that is exactly where Avon Products (AVP) currently finds itself. The internet and online shopping has made Avon’s door to door sales business model obsolete, and the company has struggled to reinvent itself in order to compete. The company’s direct selling model, and its inability to change was its own downfall, and now it is trying to find a suitor to buy the company. Whether or not the company is able to find someone willing to acquire the it remains to be seen, with some major shareholders urging for the company to forgo looking for a suitor and instead focus on new management and aggressive cost cutting measures to put the business back on the right track. The company has not had a profitable year since 2011, and there is little reason to expect a turnaround any time soon. I hate the business model, and I hate the stock.

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Chart courtesy of www.stockcharts.com

Barnes & Noble

Barnes & Noble (BKS) is a company that I love, but a stock that I hate. Perhaps a result of growing up in an age where people still checked out books from the library, I love going to my local Barnes & Noble store with my two little children and reading books to them, and watching them run around the children’s section exploring the various books. I love the experience, but I rarely buy anything while I am there, and definitely do not buy myself any books while I am there. After years of resisting, I now buy almost 100% of my books as digital downloads… and I am not alone. Granted, some of these purchases come from Barnes & Noble, but less than half at this point. The company reported fiscal second-quarter results last week, posting much weaker than expected numbers for both the top and bottom lines, and and a 1% decline in year-over-year same-store sales. Sales of its e-reader Nook fell a whopping 31.9% versus the same period last year. So far the company has avoided the fate of Borders, which went bankrupt in 2011 and closed its doors for good, but unless the company is able to improve same-store sales and grow its Nook business, the future remains cloudy, and is a stock I would definitely keep out of my portfolio.

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Chart courtesy of www.stockcharts.com

Symbols: AVP BKS GME MAT TWTR
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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