Here’s What I Think of Your Toxic Stock Picks

Thanks for reading, researching and commenting on our latest Sure Money challenge – an Open Thread where you had the chance to suggest your own toxic stock recommendations.

A lot of your picks were spot-on.

For instance, James put his finger on a stock that displays one of the nine toxic “telltales” we discussed here. John astutely pinpointed an often overlooked industry that, frankly, stinks. (I used to work as an investment banker for them, so I know.) And Mariah brought up a company that’s been on my own personal “short list” for a long time.

I’m discussing five of my favorite reader recommendations below. As always, thank you for playing.

Darryl picks Pandora Media Inc (NYSE: P):

Pandora! 10 years in business. Most users in the category. User growth has stalled. Still no revenue. Stock price rises every time the CEO goes on road shows. (Plus recent CEO upheaval.)

What I think:

I think it is extremely unlikely that Pandora will survive on its own.  The most likely scenario is that it is acquired by another company.  Unprofitable companies can only stay alive for so long before they fail and Pandora is facing more competition and shows little prospect of making enough money to make it on its own.  This is a highly speculative stock that I would avoid.

I’m not recommending puts on Pandora because the possibility it could get acquired makes it too speculative and risky.

John C. picks Air Canada (TSE: AC):

I don’t know that you would be interested in our National Airline, Air Canada, huge debts, financials full of red flags, buying back stock to support price, failing market, low CA $ making debt largely US$ harder to pay, capitalization of operating leases, foreign exchange losses.

What I think:

I used to be an investment banker in the airline industry in the late 1980s. The airline business stinks – it suffers from commodity risk (oil prices), labor unions, terrorism risk (the US industry was partially nationalized after 9/11), and enormous capital costs.  Airlines have done better in recent years (after virtually every one went bankrupt) via consolidation and charging higher prices for everything from extra bags to food, rendering the flight experience miserable for consumers. There are easier ways to make money than investing in airlines and I would avoid them.

Jerry R. picks Prudential Financial Inc. (NYSE: PRU):

After speaking with a Prudential representative who sells annuities, I would buy long term dated puts on PRU. My question to the rep was what would happen to their income product if interest rates were to continue to fall say to .5% on the 10 year treasury. She almost froze up with the thought. They are paying out 5%+ on funds that are in the bond market. They will struggle along with the banks if interest rates continue to fall as I think they will.

What I think:

Prudential like other insurance companies is being hurt by low interest rates and a flat (and flattening) yield curve.  I expect interest rates to remain low and the yield curve to remain flat, which will continue to place pressure on insurance company earnings for the foreseeable future. Prudential is a financially strong company but its earnings and capital will remain under pressure as long as that situation persists.  The stock is probably dead money until something changes.

James C. picks General Motors Company (NYSE: GM):

GM sub prime auto loans, too big to fail company, should have been broken up in 2008, tends to move with market volatility, has been a recommended buy.

What I think:

GM is a hedge fund favorite which is probably one reason why it should be avoided; it is a crowded trade that has not worked out. The stock is cheap by all conventional measures but that is because it is in a highly cyclical business that is seeing peak auto sales fueled by record auto loans (including subprime auto loans) that are unsustainable.  GM may keep proving to be a value trap since is hard to see how auto sales can get better from here.  While it is always tempting to buy a stock trading at a low P/E, there is a reason why it trades poorly and I would stay away.

Mariah I. picks Amazon.com, Inc.(NASDAQ: AMZN):

Michael, isn’t the most glaring case of a toxic stock today AMAZON? Yet it keeps delivering. I’ve tried shorting that only to be disappointed.

What I think:

I think Amazon is one of the greatest companies in the world and also one of the most overvalued companies in the world.  It created a form of profitless capitalism in which it destroyed its own profit margins as well as those of all of its competitors.  I would not touch the stock at these levels until the company demonstrates that it can make money. Last quarter’s earnings were driven by its iCloud services sector, which will see increasing competition and shrinking margins. Its main business of distributing consumer goods is a thin margin business that does not justify its rock star stock price.

Amazon has been on my “short list” for some time – see my 2016 forecast – and over the next year or two, I expect it to drop to between $400 and $500. If you want to profit, long-dated puts are the way to go. I recommend AMZN January 19, 2018 $450 puts (AMZN180119P00450000), trading at about $19.22 as I write this.

Sincerely,

Michael

9 Responses to “Here’s What I Think of Your Toxic Stock Picks”

  1. VRX? I’ve bought Jan 2017 put on VRX @ .75 for several months now. They are down to .45. Should I take the loss and close or still wait. Every site that I read about it, says the stock will go higher and will double first then up to $90. What should I do. Please advise.

    Thanks,

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