This is simply not a great time to be putting money to work in the stock market -- in fact, it might be a good time to consider selling some equities that look especially vulnerable to a downturn. Here are five names that my screen of potentially dangerous stocks turned up.
As I wrote yesterday, private-equity giant KKR (KKR) doesn't have a very upbeat outlook for the public-equity markets for 2016's remainder. The firm expects to see valuations compress after rising steadily for the past 84 months. This should keep a lid on stock returns.
That's the same conclusion that I've reached as we've seen a dwindling supply of safe, cheap opportunities. In fact, I often try to use a private-equity mindset when buying stocks, looking for companies with low EV/EBIT ratios and high Piotroski F-scores.
But to look for some of today's riskier stocks, I simply inverted that formula. Here are some names that this screen turned up:
I have a Netflix account at home and thought Blood Lines was one of the best series that I've ever watched on any broadcast medium, but that doesn't mean you should buy the stock.
In fact, I can't come up with any way to justify purchasing NFLX at its current valuation of about 326x on a trailing basis. Even if we use analysts' estimates for forward earnings, NFLX's price-to-earnings ratio is still more than 90.
The stock's F-score is also just 2.0, so the intermediate-term fundamental outlook isn't fantastic, either. NFLX also sports about a 166 EV/EBIT ratio.
Of course, I almost hate to diss Netflix because it's one of those stocks that can make you look foolish by suggesting that it's overvalued. Investors fall in and out of love with NFLX quicker than the lead characters in a soap opera do, so the stock can make sharp short-term moves in either direction.
But while the momentum crowd might fall back in love with the stock and make me look silly, I still think Netflix's valuation is way overdone.
Charter Communications (CHTR)
The valuations picture isn't much prettier at cable giant Charter Communications.
Now, Charter is a solid company that should be able to grow its core business a little over the next few years. Charter's recent acquisition of Time Warner Cable and Bright House should also make for a fine, much-larger company -- but one where the stock price is just too darn high.
Charter's current EV/EBIT is about 50, but its F-score is just roughly 3.0. So, the firm's outlook isn't all that hot at the moment. Cable TV faces significant competition from Netflix and other companies that allow me to unplug my cable box and still have access to high-quality programming.
CHTR has certainly had a great run since the company emerged from bankruptcy in 2009, but it's probably time for smart shareholders to part company with the stock.
3 Risky Utilities
Several utilities also make my list of potentially dangerous stocks.
Now, utilities have been a market leader recently as dividend-hungry investors pile into the sector. But as a result, many stocks now trade at levels that have nothing to do with their underlying values as businesses.
It's not like utilities have great growth prospects, as they operate in a heavily regulated industry at a time when the overall U.S. economy is growing very slowly. Three to look at cautiously are:
- PG&E (PCG), which has an F-score of 4.0 and an EV/EBIT 30.
- Excelon (EXC), which has a 20 EV/EVIT and a 3.0 F-score.
- PNM Resources (PNM), with an F-score of 4.0 and a sky-high EV/EBIT of 35.
I can't see any reason to own utilities in this environment, and these three stocks seem to be especially pricey right now. All have risen more than 30% over the past year, so it looks like this might be a good time to "ring the register" and sell them if you own them.
The Bottom Line
If KKR is correct, we're going to see very low returns from stocks over the next five years and multiples could contract by as much as 34%. After all, economic growth will be slow and geopolitical risks are rising.
In such an environment, owning stocks whose valuations are high and whose F-scores indicate poor fundamental prospects probably isn't a great idea.