Sell now: The outlook for these stocks is bleak

 

There is a particular point on the downward curve – somewhere beyond problem, beyond crisis, even – but not so far along as calamity. It is the point when we realize that all the things we have spent years or even decades telling ourselves can't happen, are happening. Neuroscientists have actually identified a specific brainwave pattern that occurs at this point, called, colorfully, the “Oh S***!” wave. Economists have been known to use the term as well, generally to describe the point during an expected economic downturn when it suddenly becomes an unexpected economic downturn – i.e., when it affects us.

The companies on today's list fall somewhere around that point on the curve. It is well known that there is a crisis – but companies often emerge from crises stronger than before. Netflix (NFLX), to give just one example, has already done so twice in the last ten years. But Netflix isn't on this list, nor are any companies that appear likely to emerge from their present difficulties.

Through analysis of outside economic factors, as well as telltale internal behaviors, I have concluded that these companies are doomed to lose nearly everything in the coming months. Exactly how much time they have remaining varies. In some cases, the timeline is as long as two years, but in other cases, all is likely to be over by the New Year. All, that is, but the screaming, the funerary rights, and the lawsuits.

I like to get the obvious out of the way first, so…

Sears Holdings (SHLD)

If you only check in periodically with this slow-motion train-wreck in progress, you may have missed the latest chapter, and that would be a shame. A few months back, we reported that, according to analysts, the company did not have enough money to keep itself going through this holiday season, and the analysis has proven correct. The chain's CEO and 48% owner Eddie Lampert has been pumping money into the company from his hedge fund, ESL Investments, to keep it afloat.

The problem is that Lampert can't simply give Sears money without being unfair to the investors in his fund, so Sears Holdings has had to figure out some way to offer a financial instrument to the general public, knowing that nobody will want to buy them except their own CEO. What they came up with was a combination 8% coupon bond and stock warrant offered only to existing shareholders. The warrant functions in many ways like a call option, giving investors the right to buy SHLD stock for $28.41 per share. This solution is a bad one, of course, as the warrants will either become worthless if the stock falls, or dilute shareholder value if it rises, but it may have been the best option still available.

Eddie, stop the madness. In what possible universe will you be able to effect a turnaround for this chain? Spin off the company's massive real estate portfolio as a REIT and let the rest die with dignity.

Chart courtesy of stockcharts.com

Angie’s List (ANGI)

Angie’s List started as a bad idea. Then it just kept getting worse. The bad idea was to be an online user-review site/service, much like Yelp (YELP), except a service in which users would be provided with this wondrous value-add: they would have to pay to use Angie’s List, even though Yelp, which was already better established , was free. You just know they folks at Angie’s List really believed that exclusivity would make their service desirable, and perhaps for some people it did.

Sadly, the closed system seems to have opened Angie’s List to the same sort of complaints that hit Yelp from time to time – i.e., that money is extorted from business customers who have to pay to keep favorable reviews more easily accessible than negative reviews. Soon the company began to alienate customers as well. I have warned the Street many times to stay far away from this possibly rabid dog, starting in April of 2013, and over that time, ANGI has been pounded, falling from over $20 per share to just $6.57. Recent earnings reports have also been terrible. Looks like the jig is up.

Here’s a tip, if you wish to create a successful social media service, let people use it. The social media giants are turning into true, big companies now largely because people are constantly willing to give them so much free content. Angie’s list never had the kind of content it could do anything with.

Chart courtesy of stockcharts.com

SeaWorld Entertainment (SEAS)

Animal acts have been crowd pleasers since they were performed in the Trajan Amphitheater in Rome, and so they always will be. But not since those days has the crowd come to the show in order to watch those animals kill people, as Tilikum, SeaWorld's Alpha male orca, has apparently done on at least three separate occasions, according to the documentary Blackfish.

After premiering in January of 2013, the company denied certain allegations in the film and said in a statement, “Blackfish is inaccurate and misleading.”  Park attendance dropped only slightly, and in polls, most people said their opinion of the company hadn't changed. It certainly looked as though SeaWorld had dodged a bullet, but the damage was only delayed.

The allegations in the film had legs, and in June of 2014, Congress approved a measure requiring the USDA to update the regulation of cetaceans in captivity, exposing the company to potentially devastating new regulations. In September, a class-action lawsuit was filed against the company on behalf of shareholders, alleging deception on the part of SeaWorld's management. With more damaging revelations likely on the way, the threat to SeaWorld has grown to become existential.

Chart courtesy of stockcharts.com

Abercrombie & Fitch (ANF)

Abercrombie & Fitch is one of the three A's, the other two being Aeropostale (ARO) and American Eagle Outfitters (AEO) that comprise the bulk of the high-end casual clothes market. All three are suffering due to overexpansion, which seems to be a part of an inevitable hubris that infects the entire sector, which is, perhaps, a result of (or a cause of, for that matter) a marketing tilt that stresses exclusivity. For whatever reason, it is no longer a marketing tilt that is resonating with young people. “Regular clothes” are the fashion today, which means more clothes are being sold by department store and box retail chains, as well as the Gap (GPS), the casual clothes retailer largely responsible, through a very effective marketing push, for having set the current trend in motion.

Aeropostale is already breathing its last. Of the remaining two A's, the Street still favors Abercrombie over American Eagle, but I don’t. Of the three, Abercrombie has always had the narrowest range, and seems to be less likely to successfully reinvent itself than American Eagle. Abercrombie's revenue has fallen, YOY, for the last five quarters in a row. That's a sustained, significant revenue decline, and that makes the stock's current P/E of 67.5 utterly indefensible.

Chart courtesy of stockcharts.com

Molycorp (MCP)

This one is notable not so much for what it is, but for what it represents, in this case, the folly of hype. Back in 2010 and 2011, there were several news stories pointing to a threat to US national security – that being our reliance on uncertain foreign relationships, particularly with the Chinese, in order to secure rare earth metals which have become essential to a huge number of industrial processes. Rare earth metal stocks became a craze, and MCP stock traded, for a time, over $70 per share on a cost adjusted basis.

The problem was that no rare earth metal company outside of China could match China's production costs. Though Molycorp was once the world's leading supplier of rare earth metals, the mix that the world was looking for had changed, with heavy earth metals becoming far more desirable, while Molycorp's reserves were in ore that was rich only in light earth metals.

Molycorp can no longer make enough money to support its operations, and on Thursday MCP stock fell 12%, to $1.25, on the news that it had lost even more money than expected in the last quarter. Unless you absolutely need to stick around until the paperwork gets filed, you should already consider this company dead and gone.

Chart courtesy of stockcharts.com

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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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