Stay away! These stocks are disasters

 

As the stock market continues trending higher, a lot of individual stocks are also trading near their all-time highs. However, there are plenty of train wrecks out there that investors would be wise to avoid, or cutting their losses on now before the damage gets even worse.

Knowing when to cut your losses is one of the hardest things for an investor to do. It is so easy to get emotionally attached to stocks, and it is human nature to want to hang on to losing positions out of the belief that things have to turn around and get better.

This is a natural thought process, but unfortunately our emotions can sometimes get the better of us, and lead us to make poor decisions… especially when dealing with money.

Refusing to sell losing stocks is only one of the mistakes investors make regarding losing stocks. The other common mistake investor often make is trying to “catch a falling knife”. By this, I mean looking for stocks that are on a strong downward trend and trying to buy shares at their weakest point in order to capitalize on an eventual recovery.

Trying to catch a falling knife is a mistake every investor makes at one point or another, and sadly it can be a very costly lesson. The important part is that we learn from our mistakes, and try to avoid making them a second time.

With the overall market showing so much strength, it is easy for our brains to convince us that every stock should be strong. It is easy to fall back into bad habits and either hang on to a losing positions longer than we should, or try perfectly time when to buy a stock that's falling.

This week we are going to look at a handful of stocks that you should get out of if you're holding them and definitely look elsewhere if you're shopping for a new investment.

American Eagle

It is no secret that teen retailers have struggled in recent years, and one of the worst performing stocks in the sector has been American Eagle (AEO). The company continues to struggle getting shoppers into its stores, and as a result the stock has been a true train wreck. Earnings have been falling, and in the most-recent quarter the company reported an 86% decline in profit. American Eagle has lost its “cool factor” and its turnaround program is dependent on the company's ability to revamp its brand and product lineup. So far, it has failed to accomplish either, and until that occurs, there is no reason for investors to hold this stock in their portfolios.


Chart courtesy of stockcharts.com

FMC Corp.

FMC Corp. (FMC) makes agricultural chemicals, and the last six months have not been pretty. Since hitting a 52-week high of $83.94 back in March, the stock has trended steadily lower, losing 18.4% since hitting its high, and has yet to form a solid level of support. The company has been growing revenues, but at a slower pace to the overall industry. In June, the company blamed harsh wintry weather for having to reduce both its second quarter, and its full year earnings forecast, which sent shares even lower. Looking at the chart, we see that the stock's short term 50-day moving average has crossed below its long term 200-day moving average, a clear indicator that bears are still in charge. If you have any gains in the stock it may be wise to go ahead and lock in your profits, and until the stock regains some upwards momentum I would caution against trying to catch this falling knife.


Chart courtesy of stockcharts.com

Sears Holdings

The second retailer on our list is Sears Holdings (SHLD). Sears has been trying to turn things around for several years, but continues to struggle attracting customers to its stores. Looking forward, things appear to only be getting worse, with analysts forecasting a 6% drop in earnings in 2016 versus 2015, which is likely to continue applying downward pressure on the stock. Historically, the company has been very inconsistent with its earnings and revenues, and Wall Street will be quick to drive shares lower on any signs of weakness. An upbeat earnings report in February sent shares higher, but its upward momentum ran out of steam in May with a disappointing Q1 report. Sears will next report earnings on August 21, and if the company reports another set of disappointing numbers, the stock is likely to trade sharply lower. Until the company can string together several strong quarters, SHLD is a stock investors would be wise to avoid.


Chart courtesy of stockcharts.com

Twitter

Social-media giant Twitter (TWTR) caught a lot of attention when the company went public in 2013, but so far the stock has been weak. After quickly rising to a share price of $74.73 after going public, reality returned to the stock, which has lost 48.2% of its value from that high. The company is not profitable, and has disappointed in terms of user growth. Next year things are expected to get a little better, but just barely, with analysts expecting full year 2015 earnings of six cents. A big problem with Twitter is that its user engagement has been falling. User engagement is crucial to the fate of the company, but it reported that during the first quarter its had 157 billion timeline views. This is down from 158 billion two quarters earlier, even though Twitter's overall user count rose by 23 million. More users and fewer timeline views is a clear indication that users are less engaged than they were just a few short months ago. Perhaps Twitter will follow the same path as Facebook (FB), which struggled out of the gate but is now trading at all-time highs, but it has a long way to go, and until profit and user engagement start moving in the right direction, this is a stock to avoid.


Chart courtesy of stockcharts.com

Staples

Staples (SPLS) is a company that has fallen victim to a shift in consumer habits. The office-supply retailer has struggled to compete in a world where more and more shopping is being done online, and the company has yet to solve the puzzle of earnings growth. Looking forward, analysts forecast no earnings growth in 2016, which is not going to help the stock build any momentum down the road. The company’s valuation is so low now with a P/E ratio of 13 that it would be easy to convince ourselves it is a good buy at current levels, but until it is able to start growing profits, I see little catalyst for the stock to begin moving higher.


Chart courtesy of stockcharts.com

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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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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