(Editor's note: This story has been corrected to clarify that the drug-and-alcohol-counseling company referenced below is named AAC Holdings and has a ticker symbol of AAC. It is not ACC, which is the ticker symbol of an unrelated stock, American Campus Communities.)
If I didn't already enjoy some wine in the evening, Stanley Druckenmiller's recent uber-bearish presentation at the Sohn conference would have made me take up drinking -- and here are two stocks to sell if you agree with him.
Now, I know that many "perma-bulls" will point out all of the reasons why Druckenmiller is wrong to be so bearish, but how many of them have earned 30% a year over their careers (as Druckenmiller has)? When someone who's been right a lot makes a major call, it's borderline foolish not to at least consider the person's point of view.
Druckenmiller summed up his bearish thesis at the conference by saying:
"If we have borrowed more from our future than any time in history and markets value the future, we should be selling at a discount, not a premium to historic valuations.
It is hard to avoid the comparison with 1982, when the market sold for 7x depressed earnings with dozens of rate cuts and productivity rising going forward vs. 18x inflated earnings, productivity declining and no further ammo on interest rates."
I have a hard time arguing with those conclusions, especially in light of the lack of safe, cheap stocks available today. In fact, I think most of us should spend at least as much time looking for stocks that can lead the way lower as we do searching for today's hard-to-find bargains.
So, I recently screened for companies that trade at high multiples but have deteriorating financial conditions and prospects.
I searched for companies that trade at 40x or more earnings and have Piotroski F-scores of 4 or lower (indicating that their intermediate outlook is poor). But I eliminated names that trade below book value, so as to avoid selling stocks that might have undervalued assets and could be bargains.
The list I came up with are stocks that could be disasters if the market turns lower for a sustained period. Let's check some out:
AAC Holdings (AAC)
This firm is in what would appear to be a growth industry, offering drug- and alcohol-addiction services on both an inpatient and outpatient basis.
AAC operate 26 facilities around the United States and is in growth mode. It's been acquiring and/or building new facilities and has seen increases in admissions over the past year.
Now, I have no doubt that with addiction problems growing, the firm can increase admissions going forward. However, I'm not sure AAC can make much money doing so. Profit margins are currently below 5%, and the company only has a single-digit return on equity in spite of its growth.
AAC also has a lot of debt on its balance sheet, with a debt-to-equity ratio of almost 1.0. And the firm's F-score is just 2, which means you're paying a lot for what's an average business at best.
The stock's current price-to-earnings ratio is also a hefty 44, while the forward P/E is 22. In other words, the shares are already priced for perfection -- but there's a lot that can wrong for AAC. So, I see no reason to own this stock at current prices.
Limoneira Co. (LMNR)
When life hands you lemons, sometimes all that you get is lemons -- and that could turn out to be the case for agriculture firm Limoneira Co.
LMNR's primary product is lemons, although it does have orange and avocado operations as well. The company also leases residential and commercial properties, while another division does real estate development.
However, most of Limoneira's operations are in California, where water for farms is a serious concern. Management addressed this issue in its latest 10K filing, saying that "if the current drought conditions persist or worsen or if regulatory responses to such conditions limit our access to water, our business could be negatively impacted by these conditions and responses in terms of access to water and/or cost of water."
LMNR's F-score is just 3, indicating poor prospects. But the stock's earnings multiple is sky-high at 64x trailing-twelve-month profits and 34x projected forward results.
The Bottom Line
I don't know if Stanley Druckenmiller will be proven correct about the market's direction, but I do know that he's been right a lot more than he's been wrong.
And if he's right this time, I don't want to be caught owning stocks that combine poor fundamentals with high multiples!