Wednesday, August 24, 2011

3 Stocks to Sell for the Next Leg Down


If a double dip hits, these companies are doomed

The market looks like a boxer getting pummeled by his opponent. It continues to absorb blow after blow, but it’s still standing. But how long do we have to go before it falls and the referee ends the bout is anyone’s guess.
When we first started down in July, the selling had all of the earmarks of a panic. It was no surprise, then, that we were able to bounce off the lows and recover fairly strongly. Unfortunately, it wasn’t meant to last.
Last week we endured another round of selling, but something was different with this go-around. I believe we are witnessing a self-fulfilling prophecy. The market clearly is signaling that a double-dip recession is in the cards despite there being no evidence of such an economic decline.
Unfortunately, the economic recovery is fragile, and all this selling is making people nervous. Homebuyers are spooked by market volatility, and consumers, just as frightened, are likely to curtail spending. It is that fact that has me very concerned given the dependence on the consumer.
With slow economic growth, corporate profits were likely to continue growing. A strong case for stocks rallying from here would make sense. The problem for investors today is that during a recession, profits are likely to shrink.
At the moment, Wall Street analysts have been slow to discount future forecasts of earnings. With adisconnect on Wall Street between economists forecasting slow growth and analysts projecting that all is well with corporate profits, the market could be in for another leg lower.
Even if we avoid the double dip, analyst projections need to adjust lower. Given the market’s reliance on pricing stocks based on future expected cash flow, these forthcoming analyst adjustments sets up the market for another beating.
One of the stocks I follow, ValueVision (NASDAQ:VVTV) lost 30% of its value last week after reporting results that missed expectations. That loss was after the stock was already down. Clearly there is risk at the moment, and not just panic risk.
Here are three stocks to sell for the next trip down:


The hubris of corporate management is alive and well. When Hewlett-Packard (NYSE:HPQ) announced last week that it would be reorganizing, I knew immediately that something was amiss. Shares initially rallied on the news, creating a wonderful shorting opportunity.
When management tries to create value with gimmicks instead of innovation, investors should run for the hills. Sure enough, HPQ lost 20% of its value the very next day. It is not too late to sell. Management already is throwing in the towel by exiting the tablet computer space.
We have heard this story before. Most recently, investors could sell short Palm and Research In Motion (NASDAQ:RIMM) after an initial decline and profit handsomely. If things get worse economically, HPQ is likely to hit single digits before this ends. I would sell this stock ASAP.


It has been a remarkable recovery for furniture maker La-Z-Boy (NYSE:LZB). A stock trading near a buck a share at the bottom of the market in March 2009, the company has rebounded to its current price of just over $7 per share. As recently as May of this year, shares were approaching $12 per share.
Fueling that recovery was a return to profitability. Analysts expect La-Z-Boy to make 69 cents per share in the fiscal year ending April 30, 2012. I can assure you that number is too high if the economy hits a brick wall, as is now expected. Wall Street has taken off 2 cents per share on that estimate in the past 30 days, but more adjustment is needed.
While it is true that if the company meets estimates, shares are cheap, the opposite is true if the company falls short. Furniture sales are tied to the housing market, which still is in disarray. I would sell this stock knowing that estimates are likely too high.

When markets collapse die hard, momentum investors hang on for dear life. They don’t like to let go of their dreams easily. In some cases, bull markets actually end with stocks going down while momentum names continue their ascent.
Of course, they ultimately flame out too from pure exhaustion. In the current market, cloud computing is all the rage, and one of the most expensive stocks in the category is Last week, the company reported earnings that beat estimates by 4 cents per share. More interesting was the fact the company increased guidance for the future.
The news was the opposite of what was transpiring at HP, but perhaps too rosy. While it is commendable that the CEO of the company was unwavering when asked about the future, I don’t like unabated cheerleading in the face of known obstacles. One of those obstacles is a stock price that is in nosebleed territory despite the impressive operating performance of the company.
Shares of trade for a whopping 85 times current-year earnings estimates. That valuation is simply too high no matter how you cut it. If and when the company does stumble, you will not want to be around to see the damage.
Given the economic uncertainty, it would be hard to see further upside in this stock. Even with the strong report last week, shares slipped in value. That is not a sign of strength. I would sell this stock before it’s too late.

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