Mrs. Clinton elaborated the following day with a proposed patient spending cap on drug prices, as well as stricter regulations on how much drug companies must spend on research and development (R&D). The idea of possible price controls and their impact on business in the event of a Democratic win scared the market, and from September 21-30, the iShares Nasdaq Biotechnology ETF (IBB), which tracks the biotech index, fell nearly 15%.
Since then, we\'ve seen a tug-of-war within the sector as the September sell-off brought fears to the surface that the industry\'s steady upswing couldn\'t last. So where does the trend head next? Is healthcare forbidden fruit at this point? Should investors cut and run, or are there still opportunities in this innovative niche?
These are serious questions on Wall Street right now, and it\'s an important topic that I wanted to dive deeper into with you.
Although the headline issues have primarily focused on biotechs, the extra attention has weighed heavily on all of healthcare. Several factors could have contributed to this, including withdrawals from mutual funds and other investment vehicles dedicated to healthcare investing, and expanded valuations in those companies benefitting from living in the shadow of biotech. Plus, the issues raised in biotech by Mrs. Clinton\'s infamous tweet were a reminder that all healthcare industries are facing reimbursement issues as the government and insurers look to contain costs.
However, this is where it helps to keep some historical perspective. Healthcare has still performed very strongly over the past five years. The S&P Health Care Select Sector SPDR ETF (XLV) closed at $30.49 on September 30, 2010, and has more than doubled since then. An even more dramatic move has come from the iShares Nasdaq Biotechnology ETF (IBB), which has more than tripled from $86.24 on September 30, 2010 to over $300 today. In comparison, the S&P 500 has gained roughly 65% in the last five years.
So despite the recent sell-off, the long-term trend of the sector has been solid. Furthermore, the factors that sent the group higher are still in place for further gains. Earnings growth should be good the remainder of this year and into next at a time when many stocks are struggling to realize growth. Interest rates are likely to remain low, which will also support valuations, and the aging of America and new technologies will continue to be longer-term growth drivers.
Think of it this way. Biotech remains one of the themes where transformative value is created – the cradle of real innovation in the modern global economy. Healthcare, of course, touches all of us in deeply personal ways, and the changes in recent decades are staggering. Technological breakthroughs. Drug breakthroughs. Surgical breakthroughs. Diagnostic breakthroughs. Genetic breakthroughs. You name it. And yet, we are still only in the beginning stages of life-changing discoveries.
There\'s an incredibly vast amount of growth potential here, probably more than just about anything on Wall Street\'s scene today. Not to mention the upside of investing in companies that are changing people\'s lives for the better. Talk about a win-win.
However, it\'s not all about theoretical long-term growth. It\'s about the transition from theoretical science to commercial products that produce sales that ultimately lead to earnings. The market made vast allowances for speculative propositions over the last few years, and it looks like these companies are getting a little less rope now. The premium that people will pay for growth is declining so high-multiple names are getting cut back to size.
Only one in three companies in healthcare are expected to even generate a profit in the coming year, while the rest are a long way from becoming mature enterprises. Nine out of 10 biotech companies are still unprofitable. That\'s a problem in the here and now as the market cuts risk.
But in the long term, the growth factor is real. Five years out, today\'s speculative plays will have burned out or succeeded. The upside is that the successes will make up for the burnouts.
It\'s also worth noting one critical difference between healthcare names and biotech stocks. While some healthcare stocks may not grow as fast as many of the big-name biotechs, they often do not face the same risks that come from the need to replace products with other large selling products once patents expire. Many biotech stocks at their recent peaks were not only discounting strong growth from their current product lineups, but also that they would be able to replicate these portfolios upon patent expiration, which is somewhat risky.
In bull markets, these kinds of facts get thrown out the window as greed far exceeds fear, but it is an issue that never really goes away for biotech and all pharmaceutical companies.
Here\'s my bottom line: While I believe we\'ll continue to see pressure to contain healthcare costs as our population ages, I don\'t see that as a reason for investors to stay away from the entire sector. Instead, the elevated risk only makes it even more important that you invest smartly. Volatility comes with the territory when investing in healthcare, but if you\'re in the right companies, you can weather sector-specific pullbacks and still be in position to benefit from the upside.>
Identifying the best opportunities has become trickier. We appear to have moved out of the \"rising tide lifts all boats\" environment of the last five years, so increased scrutiny is necessary when choosing where to put your money.
Right now, the sector is very company specific, and there are five main characteristics I look for in a potential recommendation: reasonable valuation, compelling catalysts, good near-term earnings prospects, at least some cash flow and rich pipelines.
That last one might be the most important. Growth is a critical element in this sector, as new drugs or treatments are what will propel stocks higher. The key is finding the sweet spot between speculative hypergrowth and some stability.
With those in mind, there are a few names on my radar at the moment. Regeneron Pharmaceuticals (REGN) is one of the big names that was hit hard in the September sell-off, but has made a nice recovery. Gilead Sciences (GILD) is also back at levels where it has found support, and Amgen (AMGN) and Celgene (CELG) are sager companies that have performed relatively well.
Looking outside of biotech, there are areas of healthcare that have been unfairly savaged. I see opportunities in traditional pharmaceuticals, devices and hospital equipment.
As the right opportunities come across my screen, I\'ll be sharing more names with you as we look to profit from a sell-off that has knocked strong companies back to reasonable – and in some cases, bargain – prices. Keep an eye out for Flash Alerts as we\'ll move quickly to jump on the best names.
As always, you can also email me at email@example.com with any questions. Thanks for reading!
Editor, Breakout Stocks
Three out of every four stocks on Wall Street were ravaged in the recent correction and while a lot of them are bouncing back from deeply discounted levels (many of which we\'re taking advantage of as bargain buys), there are still a lot of knives left to fall. Hundreds of charts remain vulnerable to additional carnage for one reason or another.
That\'s a lot of potential duds that you could be holding – names that are best avoided until they show us they have the balance sheets and fundamentals to beckon the bulls. To make sure you\'re not holding any of these portfolio pitfalls, I\'ve pulled together a brand-new list of 99 stocks that I recommend selling. Let\'s get right to it!
It\'s no secret that I adore the biotech industry and the world-changing innovation that comes out of it. But many of the highest-flying names in biotech are still years from real revenue, let alone sustainable profits. Their highly-anticipated therapies could easily crash and burn before the regulators clear them for widespread use. And in the meantime, anticipation around the industry pushes stocks to spectacular earnings multiples while feeding extreme volatility. All in all, the group has been a home run over the last three years, but with seven corrections on the tape over that period, the ride hasn\'t been smooth. We\'re still deep in the most recent bear run and at a 40% premium to the broad market on an earnings basis, so some of the names with the highest multiples remain the most precarious.
Repligen (RGEN) is a classic example of how vulnerable any Wall Street star can be to a market mood swing. The company\'s efforts to focus on selling biotech precursors to the industry instead of developing new drugs in-house have boosted revenue, but we\'re still only looking at an annualized $80 million in sales and $11 million in net profit to support $900 million in market cap. While a 30% growth rate is robust, it\'s still not impressive enough to justify a stock price above 100X current earnings. A more reasonable valuation could make it a potential candidate, but for now there are stronger combinations of growth and valuation in the sector.
Omeros (OMER) seems unable to catch a break with investors who briefly applauded positive news from the clinic only to shun the stock afterward. In theory, this stock should be a star, with a small but growing ophthalmologic franchise and a viable candidate for fighting some forms of kidney dysfunction. But with real profitability at least two years out, all we really have to ride here is terrible sentiment. And with analysts still pushing back their breakeven targets, the company\'s $50 million in cash is going to have to stretch longer than anyone expected when OMER was trading at $25 in the spring of 2015. It\'s going to be tight. As a result, I\'d just as soon stay away.
OPKO Health (OPK) has an extremely attractive business model on paper – diagnostic products and diverse drug development – but its footprint in recession-ravaged Latin America is becoming a drag. The problem is that the profits simply aren\'t likely to come around fast enough to make the stock attractive on its own terms. Analysts think this company will earn a breathtaking $0.04 per share next year. With the stock already bid up to nearly 270X that cash stream, it\'s going to take years to justify the current price action. In the meantime, the chart will remain susceptible to selling whenever the market loses its nerve.
Sinovac Biotech (SVA) markets a range of hepatitis and influenza vaccines, but quarter-to-quarter profit remains elusive and the burn rate was actually going in the wrong direction through the first quarter. At this rate, we\'ll need to see stronger progress than ever toward profitability – and given the company\'s Chinese operations, the more likely scenario is that global investors will keep selling.
Theravance (THRX) is down over 50% from its 52-week high but its respiratory drug portfolio has already started racking up sales through big partners like GlaxoSmithKline (GSK). Unfortunately, it\'s not really enough to support the dividend much less make it easier for the company to pay down an extreme $738 million debt load. Obligations are tracking at close to 140X assets as it is, which is a big factor in why Wall Street isn\'t seriously expecting the stock to be worth much more than $14 a year from now.
Mannkind (MNKD) hasn\'t accumulated quite so much debt, but its liabilities are much closer to coming due. The company has advanced $185 million in product to customers and owes vendors and other creditors close to $150 million in the short term. With only $107 million in cash and no profit on deck before 2018 at the earliest, cash flow could become a very real problem here. The science is promising, but for the company to remain solvent, we\'ll probably see a secondary offering dilute current shareholders.
Viking Therapeutics (VKTX) is small and deeply speculative, which wouldn\'t be much of a problem if the company had more than $21 million in cash to cover an anticipated burn rate of about $5 million a quarter between now and the end of 2018. Even if costs can stay at current levels, VKTX is going to need to raise more capital in the next year in order to keep the lights on. While management might contemplate an acquisition offer, it\'s just not the kind of Hail Mary scenario we should count on.
Northwest Biotherapeutics (NWBO) has a hot oncology pipeline, including a lead program at Phase III and others earlier along in the process. But once again, with $116 million in current liabilities to match against just $21 million in current assets, this company is going to need to raise cash somewhere in order to take its products to market. In the meantime, unless you\'re passionate about the science here, it\'s probably worth waiting to establish a position.
Rock Creek Pharmaceuticals (RCPI) is tiny, but with one out of seven biotech stocks trading at an overall market value below $50 million, its condition represents dozens of equally speculative names. This one is also all about the balance sheet, with $3 million in cash unlikely to be able to cover current expenses much less $6 million in accrued operating costs. Now that the share price has cracked below $1, the company is cut out of a lot of institutional portfolios and the risk of a Nasdaq delisting is growing.
Cleveland Biolabs (CBLI) tells a similar story. News of military contracts to develop anti-radiation agents is great, but with near-term liabilities outnumbering cash by a factor of 4-to-1, it\'s going to take a lot more than a lot of patents and the occasional sweet deal to turn this company into a sustainable business. Let\'s wait until the contracts get closer to turning into real products.>
We\'ll be talking a fair amount about oil in this report. Demand for energy remains robust but there\'s so much supply coming online that global markets are having a hard time absorbing it all. The first place we see this trend turn into real long-term industry pain is with the rig operators, drilling firms and other service providers. While the actual energy producers can still pump and sell from existing wells, low commodity prices give them less of an incentive to develop their resources and even less operating capital to pay contractors. As exploration and drilling projects get mothballed, the service firms go hungry and need to either lower their day rates or scale back on assets and people.
At the moment many of the biggest names in the service and equipment group are looking at severe earnings deterioration over the next year, which leaves their stocks trading at incredibly unappetizing levels on a pure earnings basis. They\'re not even eager to roll up weakened rivals yet until oil prices recover or asset prices collapse even further. With Wall Street currently betting that the former scenario won\'t play out before 2018, the odds of longer-term suffering here are too high for comfort.
I\'ve listed a few of the most vulnerable-looking names here. They really don\'t need much argument: many are great companies, but the math simply doesn\'t work out in their favor. All are facing deteriorating earnings, negative real growth and P/E multiples going the wrong way to tempt the bulls. Whatever you do, avoid those that have taken on too much debt in order to ramp up or pay their dividends, making them likely targets of that first wave of mercy M&A that the giants are anticipating now.
Helmerich & Payne (HP)
Diamond Offshore Drilling (DO)
Concho Resources (CXO)
Ring Energy (REI)
Whiting Petroleum (WLL)
RSP Permian (RSPP)
Archrock (AROC), formerly known as Exterran Holdings (EXH)
Weatherford International (WFT)
Established technology stocks are actually one of the cheaper sectors on the market right now on a pure earnings basis, but there are still plenty of more speculative names priced into the stratosphere. Traders justify the multiples by pointing to theoretical growth rates. Unfortunately, the ramp rarely slopes smoothly to infinity before something gets in the company\'s way or the market loses faith in the narrative. When that happens, the highest-flying valuations can crash on the slightest waft of disappointment – even a few thousand dollars in delayed revenue on an otherwise spectacularly quarterly earnings report is all it takes.
A few of the most precarious stories in the sector to avoid
Splunk (SPLK) has built a $630 million business out of interpreting machine-generated data from \"the Internet of Things\" (IoT) for customers, but as yet the revenue hasn\'t turned into much more than a few million dollars in earnings every quarter. While analysts are hoping the profits will accumulate exponentially, there\'s still a lot that can go wrong with the already-thin margins. In the meantime, we\'re looking at $0.11 in operating earnings this year to support the stock around $50. To accommodate that stretch, every $1,000 in profit won or lost has to account for $4 million in market capitalization. Even a rounding error can be fatal.
Zhone Communications (ZHNE) provides a cautionary tale of what happens when rounding errors go bad. This telecom equipment stock was trading comfortably above $3.50 a year ago, before a revenue shortfall pushed the company back out of profitability and into the red. Operating losses are narrowing, but the sales aren\'t coming back. My gut tells me there are better opportunities out there.
TrueCar (TRUE) is on track to grow its profits at a meteoric 100%-600% per year on paper, but the revenue curve doesn\'t tell that kind of dot-com overdrive story after all. Sales are ramping up at a relatively subdued 20% per year, which means management is going to need to keep discovering massive economies of scale to keep the EPS trend flying. If not, we\'re really just looking at a car dealer website trading at 150X next year\'s earnings.
SharpSpring (SHSP), formerly known as SMTP (SMTP), just started from too low a base. While the company\'s marketing email delivery systems can handle massive amounts of messaging, revenue has just cracked $4 million for the first time in the fourth quarter of 2015. To justify dealing with a company that\'s still at such an early developmental stage, Wall Street needs to make massive growth assumptions that may not even add up to much cash in the long run. In the meantime, the company is having to print more shares to raise operating capital, depressing the stock price and diluting once-impressive per-share performance.
Equinix (EQIX) is in much better position as the first flush of economies of scale turn up the heat on formerly tentative earnings. Bottom-line growth is tracking at a healthy 280% this year on about $2.6 billion in revenue from its portfolio of cutting-edge data centers – what we used to call \"server hotels.\" Here\'s the catch: that level of growth is almost certainly unsustainable. Linear scale improvements don\'t unlock geometric efficiencies every year. When earnings growth decelerates to a more modest 30% or so next year, this stock will still be trading at a rich 40X anticipated profits. Suddenly that\'s not such an attractive proposition.
Zillow (ZG) is nominally a nice play on a resurgent housing market, but I\'m not thrilled with the way profit remains elusive even though revenue is ramping up fast. I would skip this one until it can deliver at least two sequential quarters of real earnings. Until then, I\'m not convinced it can do much more than drift.
Zynga (ZNGA) has become hard to recognize as the game developer that rode the Farmville fad to a share price near $16 a few short years ago. At this point, a return to profitability creates an artificial perception of real, sustainable growth that I don\'t think the company\'s recent releases really support. Revenue is barely hanging on this year as it is. Extrapolating anything more impressive down the road assumes that today\'s fads endure and that management can catch lightning in the bottle one more time. It\'s no longer 2011. The social gaming world has moved on and investors should do likewise.>
While higher interest rates will ultimately come as a blessing to wide swathes of the U.S. economy, businesses that have taken on too much leverage are going to have a harder time growing – much less sustaining existing operations – once the Fed progresses the tightening cycle. Others have simply sold off so many properties in the last year that they\'re now looking at significantly smaller footprints. They\'re shrinking while their rivals have the fuel they need to expand.
Many of these companies are losing money. Others have just enough liabilities on the balance sheet to raise questions about their high valuations when financing costs start becoming a bigger drag. Either way, if you want access to a fledgling property boom, there are scores of better options to play first.
St. Joe(JOE) is still losing money in Florida residential development. Management has been supporting the stock buying back tens of millions of shares at roughly this price, but when that cash runs out, I\'m not seeing a lot of upside here
Cousins Properties (CUZ) is also supporting itself on share buybacks, but with less than $2 million in cash to support $1 billion in liabilities, it\'s going to have to sell some property fast. I hope they don\'t give away the crown jewels in order to get liquid.
Douglas Emmett (DEI) owns office buildings and apartments in California and Hawaii. They\'re great markets, but the stock is looking extremely expensive here at 74X earnings.
Brandywine Realty Trust (BDN) is a more diversified scenario so I\'m not sure where the extreme premium here is deserved. It\'s hard to buy any stock in this environment trading at close to 300X earnings, even after a 30% slide. My guess is that there\'s pain left here before the multiple deflates to the 37X industry norm.
Gladstone Commercial (GOOD) gives us another high-multiple story to avoid. While the company is moving nominally fast toward sustainable profit for the first time in years, it\'s going to be a while before growth justifies the steep P/E math.
Communications Sales & Leasing (CSAL) may be on the specialized side with its network of copper and fiber-optic cable holdings, but that novelty isn\'t worth buying in at nearly 170X earnings. We\'re looking at roughly one year of blockbuster growth ahead here. After that, this stock will remain rich.
City Office REIT (CIO) is more self-explanatory in terms of its holdings, but it\'s just not profitable and the dividend is bleeding free cash from the balance sheet.
Franklin Street Properties (FSP) applies a \"fund of funds\" model to real estate, effectively holding equity in various REITs. While it\'s an interesting model, the growth trend is wildly uneven, and the company seems to be getting low on cash to support its current expenses.
Alexandria Real Estate Equities (ARE) specializes in life sciences properties. Again, an interesting approach, but I\'m cautious around the 3-digit earnings multiple when growth isn\'t on the horizon, especially when current cash is on the thin side.
Boston Properties (BXP) has a great balance sheet even if it isn\'t really growing fast. Still, 32X earnings is a big premium to pay for stability, which makes me think this one has already been a destination for too much nervous money.
Digital Realty Trust (DLR) has a very simple challenge common to many names on this list: the current dividend doesn\'t quite line up to recent earnings flow. Management has been responsive to market conditions in keeping the payout stable, but there\'s not a lot of room left for the company to either grow or expand its quarterly payout to keep up with Treasury bonds. Skip it until we have clarity.
Piedmont Office Realty Trust (PDM) is selling off its crown jewels to soften an earnings decline. Let\'s see how small the balance sheet gets before diving in.
New restaurant concepts are one of the miracles of today\'s consumer economy. My subscribers have made a lot of money over the last few years playing the hottest new brands, with their bewitching combination of lower fat and higher operating margins. Unfortunately, not every new chain can be a breakout success, while even a few grocery chains are looking a little past their sell date
Roundy\'s (RNDY) was living large consolidating supermarkets in the Upper Midwest, but competition and a changing American diet haven\'t made its life as a public company very easy. It\'s starting to look like its private equity owners spun it out too soon as real sales growth proves elusive and profitability evaporates. Dancing around the breakeven line may generate wide swings in the earnings trend, but at the end of the day this stock looks a little half-baked.
Zoe\'s Kitchen (ZOES), on the other hand, is ramping up sales of chicken salad, wraps and other healthier fast-food alternatives at a robust enough rate to tempt just about any trader to the table. The issue here is that the chain is priced like a technology start-up, with barely $0.13 per share in current earnings to cover a share price above $38. Even boring old McDonald\'s (MCD) should justify its share price in 1/20 of the time that sky-high multiple implies. I\'d rather stick with the burger we know.
Carrols Restaurant (TAST) demonstrates that even the conventional story isn\'t always the right way to go. As the biggest Burger King (BKW) franchisee on the planet, TAST serves up plenty of old-fashioned fast food. However, this is another situation where profit and loss have been flipping from year to year and from quarter to quarter, creating artificial \"growth\" signals in what\'s otherwise a surprisingly steady revenue curve. With the shares far from cheap even in the good quarters, I\'d look elsewhere.
Luby\'s (LUB) is a relic of an earlier time, with around 100 cafeteria-style restaurants in Austin as the core of a casual dining empire that also includes Fuddruckers and other chains. The company has been making a difficult transition to life as a larger entity, but with profitability proving elusive on the once-bankrupt Fuddruckers brand, cash is in extremely short supply. Last quarter, LUB had barely $1 million on its books and another $14 million in current assets to cover $44 million in current liabilities. It\'s not fun to have to allocate funds between creditors and vendors, and the last thing I want to see here is for management to have to sell off locations or even whole brands to find the money.
Chanticleer Holdings (HOTR) is in a slightly better position, but with $2 million in cash and $18.92 million in current liabilities, it\'s going to be tight. This is a leading operator of overseas Hooters restaurants, many of which have been hit hard by global economic volatility. It looks like cash on hand may not even be enough to cover the slice of its long-term leases that are now coming due.>
If the mood in the Chinese market has gotten so bad that U.S. traders are blaming it for pain on Wall Street, it\'s clear that we want to avoid catching the falling knife until we know the worst is over. That means quarantining the weakest names that trade here as well as in China: the richest multiples, shakiest balance sheets and most precipitous negative growth trends, as well as the stocks that the market simply hates.
On that basis, it\'s actually pretty easy to screen out weakness in Shanghai. Cut these names from your emerging market portfolio and the \"China Crisis\" factor should go down considerably.
Sohu.com (SOHU) and JD.com (JD) are both losing money. If you\'re desperate for a dot-com experience, plenty of U.S. online portals can boast similar growth and fundamentals.
Sinovac Biotech (SVA) and Skystar Bio (SKBI) tell a similar story on the biotech side. At an implied P/E of 267X current earnings on SVA, you\'re probably better off playing any number of SVA\'s speculative or even proven U.S. counterparts. And while SKBI made money, it\'s also on the brink of getting delisted.
CTrip.com (CTRP) has only a single penny of earnings to support a share price above $40. It will take decades for even the most euphoric growth to bring this China travel portal in line with global peers. Meanwhile, Yanzhou Coal (YZC) is one of the worst-performing commodity plays on the planet and has room left to decline further.
UTStarcom (UTSI) is the smallest and most vulnerable of China\'s telecom carriers. No need to buy this tiny story until you see the chart turn around, and in the meantime the burn rate is getting intense.
Guangshen Railway (GSH) depends on commodity freight to cushion its passenger numbers. Commodity freight in China is far from a growth business right now.
Actions Semiconductor (ACTS) is just as vulnerable to a downswing in the global silicon industry as U.S. counterparts, and the chart is equally grim. We\'ve got a share price under $2 right now to cover an annualized operating loss of $0.50.
Concord Medical Systems Holdings (CCM) is doing a great business selling radiology services to Chinese patients, but current liabilities have gotten too far ahead of current assets. The risk of a cash crunch here is simply too high.
Country Style Cooking Restaurant Chain (CCSC) has enough down-home sense to keep borrowing in line with cash. Unfortunately, with the chief financial officer walking away in the recent turmoil, I don\'t see the stock going anywhere fast.
Shanda Games (GAME) isn\'t even trying to work with U.S. investors any more. I\'d like a little more clarity before I buy into a market with so many clouds in the sky.
Kongzhong (KZ) and The9 (NCTY) at least tell us where we stand in the Chinese gaming landscape: losing a lot of money, without much of a firm path to profitability. Avoid both names.
China Ming Yang Wind Power (MY) may be profitable, but in a world of cheap conventional energy, its reliance on subsidies makes it extremely unpopular. Wall Street gurus think this stock is worth a whopping $0.90 per share, which implies a lot of pain in the future.
Renren (RENN) shows how fragile social media plays can be on either side of the Pacific Ocean. Analysts have turned against this money-losing \"Chinese Facebook,\" warning clients to expect another 30% haircut ahead. They may be wrong, but this is not the kind of market that rewards extreme contrarian moves right now.
China Nepstar Chain Drugstore (NPD) has earnings on its side and seems relatively reasonably valued on that front. But again, those who know the company say that it\'s still at least 50% overvalued. No need to catch that falling knife yet.
Vision China Media (VISN) seems poised for a bloodbath. With net losses of $7.03 per share already on the books for last year, the company can\'t survive another 12 months of similar performance.
Sungy Mobile (GOMO) was trying to go private before Shanghai went south, but now traders are convinced the deal will fail. There\'s no reason to put yourself in the face of that much negativity, especially on a company that\'s losing money anyway.
For-profit schools have evolved from an obscure niche alternative to state and private institutions into an integral part of the U.S. educational landscape. While the most growth-oriented of these companies turned into both cash machines and hedge fund darlings, the boom has since faltered amid questions about whether some schools are actually providing the skills graduates need to find jobs and pay back their student loans.
Given the amount of regulatory pressure and outright litigation risk already weighing on these institutions to make costs and outcomes transparent, the circle here is looking more vicious than virtuous. As a result, it will be hard for many of these companies to turn their enrollment numbers around and return to sustainable profitability. These six are the ones on my screen that are still shrinking:
Apollo Group (APOL)
American Public Education (APEI)
Bridgepoint Education (BPI)
DeVry Education (DV)
ITT Educational Services (ESI)
Universal Technical Institute (UTI)
Additional rate hikes will finally give small banks some more breathing room between the interest they pay on deposits and what they can charge on loans. While I\'m bullish on the industry as a whole, two names in particular raise a red flag on my screen:
Hudson City Bancorp (HCBK) isn\'t growing fast enough to merit a 41X earnings multiple no matter what the Fed does. In fact, it\'s not really growing at all – most analysts who follow the company think cash flow is in decline. There are better banks in the New York region, much less more economically vibrant parts of the country.
Kearny Financial (KRNY) likewise appears richly valued, but in this case it\'s because the earnings side of the P/E calculations is rising off an extremely low base as KRNY booked $0.06 per share in profit last year. This year, a key acquisition could boost that cash flow by 160%, but that would still make the stock look alarmingly rich at above 60X earnings. While I appreciate growth, the one-time bump here probably won\'t do much more than level out once the merger synergies work through the system.
After years of drifting and patching, the once-legendary Greek shipping industry may finally be on the brink of running out of cash.
Most of the names on this list look vulnerable to even a minor cash crunch. Others – notably Box Ships (TEUFF, formerly TEU) and DryShips (DRYS) – are simply bleeding too much on a quarterly basis to support their operations. Meanwhile, the Greek pain puts pressure on companies like Nordic American Offshore (NAO) that should be healthy. We\'re going to see a lot of unflattering consolidation in the space. Even a deal is unlikely to bring traders a lot of joy, but until the deals start coming, I would avoid the entire theme:
Box Ships (TEUFF, formerly TEU)
Nordic American Offshore (NAO)
Danaos Corp. (DAC)
Golar LNG Partners (GMLP)
Globus Maritime (GLBS)
Top Ships (TOPS)
Some commodity stocks have weathered the last year or so of slowing demand from China and now look attractive, while others keep going in the wrong direction. These four names have been beaten up a lot, but they still have the longest distance to travel before they start paying out for investors again. Avoid them in the meantime.
Mechel (MTL) combines many red flag themes: steel, coal and Russia. While the company is finally operating in the green again for the first time in three years, it\'s going to take a lot of improvement to roll the equivalent of $9.63 per $2-priced share of red ink off the tape. With growth limping along at around 4% per year, I really doubt we\'ll see that happen any time soon.
Companhia Siderurgica Nacional (SID) is Brazil\'s answer to MTL. With Brazilian credit teetering into \"junk\" territory, it\'s not a great time to invest in any of the country\'s less-than-ironclad balance sheets, and SID fits that bill. The company is losing money and looking to sell assets to raise cash. This is not the kind of environment that gets great prices.
Golden Star Resources (GSS) is proof that everything that glitters isn\'t necessarily a great investment. Revenue and production are in decline, making a return to profitability look nebulous at best.
Banro (BAA) looks like an only slightly more bullish version of GSS. In this case, gold is great on paper, but even record-breaking production and sales isn\'t enough to keep BAA in the green. If you want exposure to precious metals, there are much better places to get it.>
I love traveling the world with my family on a cruise, but even I\'ve been hesitant to hop aboard a ship after all the negative headlines surrounding cruises: ships running aground, crimes committed onboard, viral outbreaks, fires at sea – these are just a few of the incidents that can make investors forget that cruise companies theoretically promise a week (or more) of leisure.
That\'s not to say that there haven\'t been a few hopeful glimmers in the space from time to time, but Royal Caribbean (RCL) and Norwegian Cruise Lines (NCLH) don\'t look great when it comes to the key Caribbean routes where pricing trends have been soft on increased capacity. These two companies have half or more of their total capacity tied to the region and capacity is actually growing as new ships come online in the next few years. In an effort to blunt the impact of more capacity and fill berths, RCL and NCLH could see some price cutting and promotional activity, even while food, payroll and other expenses may see upward pressure.
Let\'s wrap up with another look at the core of the global commodity crunch: the oil sector. There will be both winners and losers in this space, so I hand-picked names that have the least cash to cover their current obligations, making them especially vulnerable to join the first wave of consolidation in the industry when it comes.
With a few exceptions, these are small and fragile companies. The strongest are trading at what should be obscene price multiples – sometimes as low as 3X-6X earnings – because that\'s what the market will pay to take on the risk of a default. Most are simply bleeding cash, making P/E calculations meaningless.
At $110 per barrel, I was cautious about these names, but figured they deserved the chance to scale up before their bills came due. Last fall at $60 per barrel, their business models started to drag. At recent prices back above $30, I suspect the pain is getting unbearable. If you\'re looking for a fire sale in the oil patch, I\'d start with these names:
Cheseapeake Granite Wash Trust (CHKR)
Emerald Oil (EOX)
Lucas Energy (LEI)
Torchlight Energy Reserves (TRCH)
ZaZa Energy (ZAZA)
EQT GP Holdings (EQGP)
EQT Midstream Partners (EQM)
Erin Energy (ERN)
CONSOL Energy (CNX)
Royale Energy (ROYL)
Dakota Plains Holdings (DAKP)
Enbridge Energy Partners (EEP)
Escalera Resources (ESCRQ)
Contango Oil & Gas (MCF)
Exxon Mobil (XOM)
The biggest company on this list is also the biggest oil company on the planet, Exxon Mobil (XOM). Even with shares down 24% from the mid-2014 peak, cash flow receded even faster and has left the stock trading at a rich 21X current earnings. The numbers get even worse looking long term as year-over-year growth is unlikely ahead of fourth-quarter results that won\'t be out until early 2017. The company was also forced to stop share buybacks, refining margins are narrowing and even if oil gets to $60, it\'s hard to see XOM regenerating the cash flow to justify its $300 billion market cap. Add it all up and XOM is just not a stock I have a lot of conviction in right now.
There you have it! Nearly 100 names that I recommend you move on from if they\'re stinking up your portfolio. My job is to keep you in only the top opportunities that Wall Street has to offer and I take it seriously. I will always be in touch as soon as the right one hits my screen, and if they any of these sells ever turn back into fresh buys, I\'ll let you know that as well.
Editor, Breakout Stocks