Head for the hills: Get out of these stocks at a run and don’t stop running

 

Well, last Friday wasn’t so bad, was it? For some reason, the market that fell after blowout Amazon and Apple earnings rallied after a slightly less significant earnings win from Alibaba. It is possible that talk of a trade war has focused investors on China for the time being, but I think the real issue plaguing the market is somewhat deeper and has a lot to do with the confidence of wealth managers, that small sub-class of money managers who manage the money of the ultra-rich, and whose influence has grown greater and greater in proportion to the rest of the market, just as the wealth of their clients has done the same.

Their disproportionate influence is particularly contagious because they know each other, as people at the top level of any profession do. They also talk to each other as openly as they choose about their plans, since, like it or not, wealth managers beyond a certain level are never prosecuted for insider trading. It seems more and more likely that we are seeing the second leg of a massive asset re-allocation by wealth managers based on the Trump tax cut, which is to say, they followed the old market axiom of buying on the rumor and selling off on the news, though in this case it was more that they bought on the probability and are now selling on the actuality. The fact that we can now see that such a move was extremely profitable and extremely shrewd makes this even more likely; they are shrewd people.

But, it doesn’t bode well for the rest of us. The ultra-wealthy and their wealth managers can read an average P/E as well as anyone else, and they know the market is overbought. If they continue, as I believe they have only recently begun, to take their toys and go home, stocks are in trouble. Here are a few that I believe could be hit the worst.

Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

Micron (MU)

With it’s forward P/E of 4.83, Micron is cheap. Compared to NVIDIA (NVDA), a company and a stock I like much better, a purchase of MU shares buys you eight times the amount of forecast earnings. When you look at the long term, however, it starts to seem as though perhaps a factor of eight is too low, given that NVIDIA’s revenue, and earnings, and (slightly different) earnings per share are all on a sharp, upward trajectory, while Micron’s have all been whipsawing up and down for years—well, actually decades. Micron’s supporters are quick to point out that a lot has changed, and so it has. This is technology, and things are always changing. What hasn’t changed is that Micron makes memory chips which inevitably become cheaper and cheaper to produce as a techno-industrial cycles progress, meaning that Micron can produce more and more of them, right up to, and often a bit beyond, the point where no one wants to buy them anymore. Check out a long-term chart of MU stock—one that goes back 30 years or more, a range not currently offered by my chart service—and you’ll quickly see the quagmire that this stock turns into whenever the least little thing goes wrong for the economy.

Chart courtesy of www.stockcharts.com

Carnival (CCL)

Carnival suffered badly after its famous poop cruise a few years back, and as malfunctioning ships became distressingly common, I and many other analysts decided to stand aside for a while until it was clear that the company had managed to properly wipe its bottom. Now that that seems to have happened, many analysts have swept back in with glowing forecasts, but I’m content to stand aside for two reasons: first and most obviously, the cost of oil is rising, and ship fuel isn’t nearly the complex, high-tech stuff that jet-fuel is—it will soon enough fall into synch with oil. Second, and perhaps more controversially, cruising is the vacation habit of the middle class, the class which, as you may have heard, is ceasing to exist in America. Those who work in America will have to forego vacations again soon, just as they did following the 2008 crash, while for those who own America, the idea of jumping on cruise ship and rubbing shoulders with the unwashed masses has about as much appeal as, well, wallowing in poop.

Chart courtesy of www.stockcharts.com

Starbucks (SBUX)

As recently as 2014, Starbucks was an incredible company with a seemingly limitless ability to drive its revenue higher and higher, no matter what was happening outside the store. Even the crash of 2008, which seemed to wipe out half the stores in existence did little to slow the company’s revenue growth. That’s remarkable, but at some point, Starbucks did a thing that it should not have and failed to do a thing that it should have. What it should not have done was attempt to shake customers down by throwing seasonal trinkets—and worse, music—in their faces while they stood in line. By entering into the music business, Starbucks grabbed at a revenue stream that would inevitably collapse due to digital distribution. What the company did not do was magnify its revenue by providing customers with real, actual food. Starbucks somehow failed even to provide much in the way of breakfast (it goes well with coffee, I hear) despite the fact that consumers are crazy about it, as was recently demonstrated by McDonald’s. Money in Starbucks is likely to do nothing for you for a very long time, at best.

Chart courtesy of www.stockcharts.com

Yum! Brands (YUM)

Yum! Brands is the company that owns the fast-food triumvirate of Taco Bell, KFC, and Pizza Hut. The company had been telling investors for years that its main engine of growth was China, but then, in 2016, it sold off its Chinese operations. We can only assume from the fact that it has dropped into revenue and earnings stagnation that it was right all along, but how that could possibly be anything other than discouraging, I can’t imagine. One valid question is all that remains: is there reason to believe growth will start up again in the coming years? The answer is a partial yes, do mostly to the 53% of the company outside the US, for the US itself has long been a mature market where fast food restaurants are as likely to close as open. This company is really only left, therefore, with a remnant of a remnant of its future growth prospects. There’s not much to stick around here for.

Chart courtesy of www.stockcharts.com

Tesla (TSLA)

I’m not nearly the Tesla hater that recent months would have me appear, but shares of TSLA are greatly overpriced given the potential profits of the company which are now seriously threatened by competition to which, through frequent delays, Tesla has given nearly a full year more of catch-up time than it first forecast. There is also more risk than ever before, which can be summed up by what nearly all analysts agree is the certain need to raise capital before of the end of the year, a risk which is only exacerbated by Elon Musk’s increasingly strained denial of the same, a strain which he now indulges by launching Twitter attacks against his critics. No, Elon, that doesn’t work for you, either. Is it just me, or does Musk, who is said to have been the inspiration for Robert Downey Jr.’s portrayal of Tony Stark, now look like he’s doing an impersonation of Robert Downey Jr.’s Tony Stark? Alas, reality often turns absurd more quickly than fiction.

Chart courtesy of www.stockcharts.com

Symbols: CCL MU SBUX TSLA YUM
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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