Here are 5 stocks I would sell right away, starting with Kellogg
Posted: May 19, 2015
Selling is harder than buying.
That’s what many professional investors, including myself, feel. When you buy something, your thought process is fairly straightforward. A stock looks attractive based on thoughtful analysis (or maybe heedless intuition), and you buy it.
Selling is another matter.
If a stock is down, you don’t want to admit you made a mistake. If it’s up, you tend to fall in love with it — and besides, you don’t want to pay taxes on your gains. For those reasons, and many more, you see relatively few sell recommendations. But here are five stocks I would sell now.
KELLOGG
Kellogg Co. (K) is a household name, which provides investors with comfort.
It’s false comfort, in my opinion.
The company’s cereal business is mature. So the company has diversified into snacks, cookies and crackers, most notably by acquiring the Pringles brand. But Pringles, Cheez-It, Pop-Tarts and the like seem to me a bit out of touch with trends toward healthier eating.
Kellogg stock sells for 17 times estimated earnings for 2016, a pretty normal multiple for a stock with steady growth, which many people assume Kellogg has. But the company’s sales and earnings declined last year and first quarter 2015.
ABBVIE
When AbbVie Inc. (ABBV) separated from Abbott Laboratories in January 2013, its stock opened at about $32 a share. It is near $66, so it has more than doubled in 2 1⁄2 years. This leaves it trading at five times revenue and 76 times book value (corporate net worth per share), both high multiples.
AbbVie’s debt totals more than $15 billion, or about 11 times stockholders’ equity. There may have been a time when such debt was prudent for a pharmaceutical company (though I doubt it). But nowadays, with generic competition and heavy government involvement, the drug business isn’t as lucrative as it used to be.
SABRE
Sabre Corp. (SABR), an online travel services vendor, once was a branch of American Airlines. Spun off from American in 2000, it underwent a leveraged buyout in 2007 and re-emerged as a public company in 2014.
Leveraged buyouts often leave behind a lingering legacy of debt, and that’s the case here: Sabre’s total debt is more than 10 times stockholders’ equity.
Companies can handle that sort of load as long as everything goes well, but Sabre reported losses in 2012 and 2013. Its long-term debt of more than $3 billion dwarfs its 2014 profit of about $69 million.
SIX FLAGS
Everyone likes a good amusement park. But I don’t like Six Flags Entertainment Corp. (SIX) stock. No question, it’s been an excellent holding the past five years, going from about $10 to near $50. But roller coasters don’t go up forever, and I think this one may come down soon.
Let’s not forget that the company emerged from bankruptcy in 2010, after reporting losses for half a dozen years in a row. Let’s not forget that its competition includes Disney, which is a formidable foe. And let’s remember that the company has shown almost no revenue growth in the past decade.
AXALTA COATING
Axalta Coating Systems Ltd. (AXTA) is a perfectly good company, priced as if it were a great one. The company makes coatings, primarily for cars and trucks. It sells both to original equipment manufacturers and to repair shops.
My beef is that the stock looks overvalued at the recent price of about $34. That’s 103 times recent earnings and 25 times the earnings analysts expect in 2016.
It’s nearly eight times book value. In my judgment, the company’s earnings history isn’t long enough, strong enough or consistent enough to justify those valuations.
PAST RECORD
I haven’t kept meticulous records on my past sell recommendations, so I can’t provide a multi-year track record, as I do with most of my columns.
My three new sell recommendations from a year ago worked out well. They declined an average of 12.1 percent, while the Standard & Poor’s 500 Index rose 15.6 percent from May 20, 2014, through May 15, 2015.
Sprint Corp. (S) was down 46 percent, and MGM Resorts International (MGM) fell 18 percent. American Airlines Group Inc. (AAL), however, surprised me by rising 28 percent.
On the bad side, last year I reiterated my previous sell recommendations on Facebook Inc. (FB) and Netflix Inc. (NFLX). That piece of stubbornness hurt anyone who listened to me as the stocks rose 37 percent and 65 percent, respectively. I will make it a point to keep my mouth shut about those two stocks this year.