In pulp fiction, the gangster Marsellus Wallace, played by Ving Rhames provides a deceptively deep bit of insight to the boxer, Butch Coolidge, played by Bruce Willis. “Pride only hurts. It never helps.” I hope it is clear why I bring this up with respect to loser stocks. Nothing is more common, particularly among new investors, than to find it hard to let go of losers. Sometimes this is for the most sympathetic of reasons, that being that new investors tend spend a lot of time doing research on their stocks, and while that research doesn’t statistically give them any better odds than pure chance, it does tend to attach some ego to their stock picks.
Also, investors come to feel a certain affection for their stocks. This is sweet, but just as destructive. You don’t give up on your puppy, no matter how bad his performance, so if your feelings for your stocks are in any way similar, you are pretty much doomed to ride them all the way down.
In some cases, I’ve had negative—or positive—views on these stocks in the past, but in those cases, the situation has changed so dramatically that a complete re-analysis is called for. This analysis should in no way consider where you bought the stock. A loser is a loser whether you are down 10%, 50%, or 90%, and you should sell it. In all cases, remember to consider these ideas as just that, ideas, and do your own research before making any move on the stock market.
Shake Shack (SHAK)
The penny stocks of the nineties were all said to be the next Microsoft (MSFT), but none of them were. Likewise, following the rapid growth of Chipotle Mexican Grill (CMG), many stocks have been sold as the next Chipotle. If only they’d been sold for a penny, they might—might—have been worth buying.
Perhaps I’m being cynical here, but it seems to me that the restaurateurs and their partners in the IPO market must have noticed that people who invest in fad restaurant stocks don’t know how to perform a basic fundamental analysis, because time after time, these stocks were put on the market at a price many times what their earnings could sustain—even in the case that the restaurants fulfilled the most optimistic growth projections, which they never did.
This may be the hardest on the list to walk away from, psychologically, because you didn’t just make a bad pick, you got scammed. (Disclaimer – I am merely using colorful language to describe my opinion of the stock. I’m not accusing anyone of wrongdoing. Still, though… ) If you’ve been in SHAK since the beginning, you are down 20%. If you bought at the peak, you are down 64%. Either way, that’s enough. This company needs to expand rapidly, and to raise its pathetic profit margin of -6.5%, but the faster it expands, the lower its profit margin falls.
There’s no way out.
Oh, Micron Technology—you heart-breaker!
This company makes DRAM chips, which are memory components in most of the world’s computers and smartphones. That’s why, when people are buying lots of computers and smartphones, the company makes a killing and many an investor is lured in by its incredible (seeming) momentum. Unfortunately for those investors, Micron’s southbound momentum can be even more impressive than its northbound. In some ways, this is like an oil company. There are a great many companies that can make DRAM chips, and they all do about the same thing, so when the industry over-estimated the future demand for chips, as it did in 2014, it created a glut, and gave customers the choice of going with whoever offered the biggest discount.
And so, the story is simple. Prices are out of Micron’s control, and because the PC market continues to wane, prices are falling faster than Micron can adjust. From its 2014 peak over $36 per share, MU is now down to $10.88, but as the oil sector taught us time and time again last year… it can always get worse.
Linn Energy (LINE)
Linn Energy is such a great object lesson I can’t resist pointing it out. LINE stock was a market darling due to its extremely high yield. I did my best to convince people that this was a very risky play, but many refused to believe that, often saying that there was no proof that LINE was a risky stock. For those who don’t know, here’s a nugget to hold onto: the yield was the proof that LINN was a risky stock.
In mid-2014, shares of LINN were trading for more than $30. I’m sure I don’t have to explain what then went wrong. Today, the gambler-types of the market are excited because the stock recently jumped from $0.50 to $1.50. Super. But its next jump will likely be into bankruptcy.
Volumes could be written about the transformations this company has been through in just the past four years. Back then, it was a low margin silicon-wafer producing industrial company called MEMC. But the company smartly used its silicon to break into the solar power industry, where it started making real money in finance and installation. Then, it began spinning off assets to form small, dividend driven “yield-cos.”
The money from those sales was quickly reinvested in acquisitions such as First Wind and Vivint Solar, the latter of which was a large and successful solar installation firm.
And that’s exactly when the energy markets began to tank, led lower by the controlling fuel, oil. SunEdison was caught over-extended, and the result couldn’t have been uglier. Today, the company is selling off whatever assets it can just to try to stay in business.
Bad luck? Maybe. But it might be argued that in spinning off its more predictable divisions to buy other companies with higher margins, SunEdison was playing fast and loose, never leaving itself a buffer against the unforeseen. This company was poking the bear, and it got poked back.
From its high over $30, SUNE stock has fallen to $1.80. So what are you waiting for; it’s game over, man.
CONSOL Energy (CNX)
Even a year ago, there were quite a few people who didn’t really get it. Coal’s days as an energy source in the US are numbered. Now, most people do. Once giant Peabody Energy (BTU) has taken such a beating that it had to declare a fifteen-into-one reverse stock split.
Fortunately, CONSOL Energy is more diverse. Unfortunately, it is diverse only as far as oil and natural gas, each of which is its own horror story, at lease from a supplier’s perspective. As you might expect, things are pretty bad. At its current burn rate, the company will lose $375 million this year, and it only has $72 million in cash. It could try to borrow money, but its current debt of $3.7 billion is already more than its market cap of $2.54 billion, so ask yourself, would you lend the company money? If you hold shares of CNX, every bond-holder is ahead of you in line to get any money out of this company, and it doesn’t look like they’ll ever be paid off. Here’s a prediction: if you hold onto CNX, the words “No consideration for shareholders” are in your future.
Not only are this company’s days numbers, we might be talking here about a number you could count on your fingers.