Stocks To Sell is an occasional column analyzing market trends and highlighting equities investors might want to avoid for now.
Stocks often get hammered after reporting weak earnings. But often the worst carnage comes during the weeks leading up to earnings season -- the period of time we're in now. That's when companies get their first inklings that they may not meet Wall Street targets and have no choice but to go public with that information. Inevitably, the stock gets slammed on the Street's reaction to such negative surprises.
Warnings often hit whole sectors. It may sound lame (and often is) when companies blame their weakness on external events like the weather or economic conditions. But such excuses can also be quite legitimate. The following are some trends that could (or already have) trigger earnings warnings in certain sectors -- and some stocks you might need to worry about:
Dining slump: On June 21, Cheesecake Factory Inc (NASDAQ: CAKE) warned that higher costs and and industry softness would mean its second quarter growth would not be as high as forecast. Analysts downgraded the shares and the stock fell 7% that day to $24.85. Analysts think the company is well-run, but say higher gas prices have hurt restaurants and higher food costs, including dairy costs, have hurt profit margins. Starbucks Corp. (NASDAQ: SBUX), too, faces higher costs and continues to slide, especially after the CFO commented recently that it would be hard for the company to meet its 2007 earnings targets.
Who is next? Almost any restaurant that is a cut above cheap fast food could face headwinds. Applebee's International (NASDAQ: APPB), PF Chang's China Bistro (NASDAQ: PFCB) and Chili's parent Brinker International (NYSE: EAT) could be vulnerable. Analysts are newly worried about Chipotle Mexican Grill (NYSE: CMG), which was downgraded by analysts on June 22.
Slowdown in shipping: FedEx Corp. (NYSE: FDX) is confronting a slowdown as higher gas prices increase costs and the slump in the housing sector adds up to slower consumer spending and fewer packages being shipped. The stock has held up well, considering. But other companies in the shipping industry face the same headwinds. Think United Parcel Service (NYSE: UPS). And even given Buffett's interest in the sector, railroads like Union Pacific Corp. (NYSE: UNP) and Burlington Northern Sante Fe (NYSE: BNI) could disappoint if the economy continues to slow.
iPhone effects: The introduction of the Apple (NYSE:AAPL) iPhone, now just one week away, will no doubt take share from other handset and handheld computer companies. For example, Motorola (NYSE: MOT) has stumbled as investors worry its RAZR is being lapped by new handsets. Cowen and Company recently cut its forecast for Motorola. Nokia Corp. (NYSE: NOK) thinks it can take share from Motorola, but can it? Its likely that some consumers have delayed their purchases of new phones until they could get a look at the iPhone, which means rivals could be hurt this quarter, even before the iPhone debuts.
Sub-prime financial fallout: If a giant conglomerate like General Electric (NYSE: GE) can have its earnings crimped by the sub-prime mortgage fiasco, then any investors in the financial sector better watch out. Peter Cohan already warned us about selling the stocks of specialty finance companies that focused on subprime lending, but now all manner of financial firms are getting hurt. H&R Block Inc (NYSE: HRB) took a hit. Countrywide Financial (NYSE: CFC) could face more pain, believes Bank of America. Watch for mortgages to tarnish more earnings results this quarter.
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Reader Comments (Page 1 of 1)
6-22-2007 @ 7:38PM
Sheldon L said...
If FedEx drops much, it might present an opportunity for value investors. This is a very high quality company with limited competition and still has long term prospects for growth.
6-23-2007 @ 1:10PM
PFLAIusa said...
good information
6-23-2007 @ 4:16PM
Mike N said...
While this article would say to sell stock that are underperforming, others would say to buy when the stocks are at a value.
6-23-2007 @ 4:16PM
Mike N said...
Take a look at Tazer. It was suppose to be worthless when a police officer zapped a man that required him to be taken to the hospital, Now with new order in, the stock is soaring. Can't make a blanket statement of rules when buying a stock. Each stock has its own story to tell.
6-23-2007 @ 9:35PM
Mr. noitall said...
I've been warning you all about "fad" company Starbucks for a long time. Another company I don't like is Apple, I've been wrong about that one, but now I would say that anyone holding it should protect themself with a stop loss order.
7-03-2007 @ 1:21PM
b andrews said...
could not find a place to voice my concerns:
i find it rather awful, that the dollar slips EVERY TIME when social security mails pensions to europe.
pensions are due in germany on the fifth...again we lost another euro cent to the dollar...WHY ?
7-24-2007 @ 10:54PM
Cathy Tew said...
Over the past 23 years in the industry, I have seen the bull. I also have seen the bear and the pig.
History can repeat itself.