Even though many stocks have rebounded powerfully from this year’s pandemic plunge, some of the best-known US companies have continued to suffer amid coronavirus-induced shutdowns, setbacks and global recession. That may tempt some investors to see them as tremendous bargains. And in a number of cases, that will be true as the economic recovery lifts corporate revenue and profits.
But for certain stocks, the downturn will persist. Investors should shun those “toxic” stocks, according to three investment experts who specialize in analyzing beaten-down stocks and separating long-term potential winners from likely losers. Although the stocks could experience short, powerful rallies, the challenges these companies face are formidable and their long-term prospects are dim. Some may never dig out from under the mountains of debt they have taken on, including new debt in recent months. Some may not fully adjust to shifts in consumer trends that emerged or accelerated this year, such as online shopping…working from home…and viewing new movie releases from home. It is very unlikely that these stocks will outperform the overall market long term.
Bottom Line Personal asked the experts which are some of the toxic stocks that investors should avoid…
Norwegian Cruise Line Holdings (NCLH). 2020 stock performance: –71%.* The company faced scathing criticism after leaked e-mails showed that sales staff had been told to mislead customers about coronavirus risks. Norwegian is the smallest of the major cruise lines, with just 28 ships, and it has the shakiest balance sheet. Its CEO has warned investors that there is “substantial doubt” about its ability to continue, in part because it is being crushed by more than $10 billion in debt, nearly as much as industry leader Carnival, which is three times as big. Unlike Carnival, Norwegian offers much higher-priced, luxury-style trips so it can’t use bargain-priced vacations to lure back consumers. Many of Norwegian’s ships aren’t expected to sail again until next summer and then only at 50% capacity. And the company did not qualify for federal bailout money because it is domiciled in Bermuda to avoid US income tax and labor laws.
Macy’s (M). 2020 performance: –57%. The embattled department store icon, which operates more than 700 stores including Macy’s and Bloomingdale’s locations, has been able to skirt bankruptcy so far this year, unlike Brooks Brothers, J.Crew and Neiman Marcus. But the pandemic has greatly accelerated online shopping trends and the decline of American malls…and likely derailed any hopes for Macy’s turnaround plans. The company expects to post a nearly $1 billion loss in its second fiscal quarter and is saddled with 124 million square feet of physical retail space—the most square footage of the apparel-based department stores. To survive, Macy’s had been trying to transform itself into a different kind of clothing retailer. But it can’t match the e-commerce acumen of H&M…the steep discounts and fast-changing inventory of off-price retailer T.J. Maxx…or the financial stability of Saks Fifth Avenue parent Hudson’s Bay, which recently went private.
Charles Sizemore, CFA, is principal of the investment advisory firm Sizemore Capital Management, Dallas, and coauthor of Boom or Bust. SizemoreCapital.com
Occidental Petroleum (OXY). 2020 performance: –67%. Oil-price wars and global travel restrictions led to a massive oil glut this year and the lowest prices in two decades. While a recent rebound in oil prices to $42 a barrel and hopes of a recovery in global demand by 2022 could boost some energy stocks, it won’t do much for Occidental Petroleum, the largest shale-oil producer in the US, which posted a $1.8 billion loss in the second quarter. The problem: Occidental carries one of the highest debt burdens of any major oil and gas company. That’s because last year, the company won a bidding war to take over its shale-oil rival Anadarko Petroleum. The ill-timed deal left Occidental with $39 billion in debt, much of which comes due in the next two years. And the oil-price plunge dramatically lowered the value of Anadarko’s international assets, which Occidental was counting on selling off. The company’s credit rating was recently downgraded to junk status, and it is being sued by shareholders and bondholders after announcing a dividend cut of more than 90%.
Brookdale Senior Living (BKD). 2020 performance: –62%. Brookdale is the largest operator of elderly-housing care in the US. The company has more than 740 senior-living, assisted-living and dementia-care communities in 45 states. Brookdale had looked like a long-term winner, given the need for senior housing by aging baby boomers. However, that wave of demand may never materialize because senior facilities have become pariahs during the pandemic. More than 40% of all US coronavirus deaths reportedly have been linked to nursing homes and senior facilities. For the second quarter, Brookdale reported a $118 million loss as families moved elderly members out of its facilities, and hospitals and physicians made fewer new referrals to the company. In June, a class-action lawsuit was filed against Brookdale claiming that it had “chronically insufficient staffing” and that residents did not receive the care and services they had paid for. Its $3.5 billion in debt adds further pressure.
AMC Entertainment Holdings (AMC). 2020 performance: –18%. The world’s largest movie theater chain shut all 1,000 of its theaters for months, triggering a $561 million net loss in the second quarter, the worst showing since the company began in 1920. AMC has survived in recent years by buying up most of its competition, giving it a total of 11,000 screens that it owns or operates. As AMC prepared to reopen theaters, its stock prices rebounded some. But the coronavirus has permanently altered moviegoing. Consumers have become comfortable paying double-digit prices to stream new releases at home. And movies likely will play in theaters for much less time before moving to home video in the future, upending the way Hollywood has done business for decades. Universal Pictures recently got AMC to agree to shrink the “theatrical window” for new motion picture releases from 75 days to just 17. AMC’s free cash flow, already thin before the pandemic, likely won’t be enough to service its outsized debt.
Bruce W. Kaser, CFA, is managing director of The Turnaround Letter, whose model portfolio has produced annualized returns of 8.7% over the past 20 years, vs. 6.1% for the S&P 500.
American Airlines Group (AAL). 2020 performance: –54%. Legendary investor Warren Buffett ditched Berkshire Hathaway’s entire multibillion-dollar stake in American Airlines and other leading carriers at a “substantial loss” in April as passenger traffic plunged and the stock cratered. The federal government stepped in to provide $10.6 billion in loans to American, and between April 23 and June 8, its stock nearly doubled. That doesn’t make it a buy now even if the public’s flying concerns continue to ease. American, which emerged from its last bankruptcy in 2013, has the weakest balance sheet of any major carrier by far. At the end of the second quarter, it faced $40 billion of debt. By comparison, industry leader Delta had about $14 billion in debt. Even if the industry rebounds strongly, American has been forced to scale back its operations more than other carriers just to survive. It retired about 100 aircraft including all of its Boeing 757s and 767s and plans to eliminate service to as many as 30 US cities.
Boston Properties (BXP). 2020 performance: –36%. Boston Properties, the leading big-city office landlord in the US, has seen its future upended as the corporate work-from-home trend has investors completely rethinking the future of office space. About 55% of large employers now say they expect to make working from home an option for employees, meaning rents for long-term office leases may shrink considerably. That could do considerable damage to Boston Properties, whose 196 properties are in major cities that are likely to be the hardest hit, including New York, Boston and San Francisco. In the second quarter, Boston Properties income dropped about 14% year over year, mostly due to a write-off from the bankruptcy proceedings of a major tenant—Ascena, the parent of retailers Ann Taylor and Lane Bryant.
Vitaliy Katsenelson, CFA, is CEO and CIO of Investment Management Associates, Greenwood Village, Colorado, and author of Active Value Investing and The Little Book of Sideways Markets. IMAUSA.com
*All stock performance figures are year-to-date through August 31, 2020.