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  1. Home
  2. / Investing
  3. / Energy

Earnings Torpedoes Could Blow Holes in Your Portfolio

List compiled by Michigan business students has names to sell, avoid or short.
By TIM MELVIN Aug 23, 2016 | 03:00 PM EDT
Stocks quotes in this article: TSLA, SCTY, HAL, SWN, XEC, LNG

The world is sitting in anticipation of Fed Chair Janet Yellen's speech at Jackson Home later this week. I can't imagine she will say anything that is much of a surprise. We know the Fed wants to raise rates and she will hint at such a move, but the reality is that the economy is not strong enough to justify anything beyond a hike just to say they did move, and the Fed minutes reflect the fact that there is still opposition to even a token move to reload the toolbox. It is a waste of time to sit around wondering what she will say, but that will be the major preoccupation of Wall Street all week.

I prefer to spend my time kicking over rocks looking for ideas that might make us money or perhaps keep us from making a serious mistake with our investment dollars. One of my favorite rocks to kick over is the research done by the students at the Tozzi Center at the University of Michigan Business School. Each month they put forth two lists of stocks, one potentially undervalued stocks and a second one called earnings torpedoes that have been a great source of sell, avoid and even short ideas. I haven't visited the list in a few month, so it's a good time to check in once again.

Tesla (TSLA) remains on the list, as does its acquisition candidate, Solar City (SCTY) . The combination may well be a double dose of ugly. I have to admit that Elon Musk is quickly becoming a hero of mine. He has figured out how to get investors, and to some degree taxpayers, to give him the resources to build all his high-tech dream toys and make him rich at the same time. He is a visionary, but he is also one of the great promoters of all time. In time, the other auto manufacturers will catch and pass Tesla in both electric and driverless cars and the stock will languish. At 130x hoped-for earnings and more than 7x revenue, the stock holds no interest for me and is probably a decent candidate for a chicken short using put spreads.

Energy stocks are on the list, and as much as I might want to see higher oil prices to bail out the stupid choices I made in late 2014 and early last year, many, including our own Dan Dicker, think we may have additional weakness ahead. Dan pointed out yesterday that while the Saudis are making noises about supporting prices in advance of the OPEC meeting, their August production is the highest ever. Other OPEC nations also have the pumps running full blast to try to keep up and collect their share of oil dollars. To top it off, the International Energy Agency this year lowered its demand forecast, saying, "Global oil demand growth is expected to slow from 1.4 million barrels a day in 2016 to 1.2 million in 2017, as underlying support from low oil prices wanes."

Halliburton (HAL) is the most prominent oil name on the torpedo list. Southwestern Energy (SWN) , Cimarex (XEC) and Cheniere (LNG) are other well-known energy-related stocks that make the list of sell or avoid earnings torpedoes for August. If we do see oil process reverse course in the last few months of the year, the gains from the January weakness could evaporate quickly and these stocks are the most vulnerable, according to the Tozzi Center.

Once again this month, biotechs are far and away the dominant sector of the list of potential blow-ups. I talk to people every day who are trading the smaller biotech stocks searching for the next big thing, and I think it is the financial equivalent of juggling live hand grenades with the pins removed. Investing in biotech requires in-depth medical and scientific knowledge most of us just do not possess. The most important words in investing are "I don't know," and we should use them liberally when it comes to biotech stocks. This is one area of the market where I think finding a fund manager with specialized knowledge makes good sense for most investors.

The earnings-torpedo model developed by the University of Michigan Business School has done a great job identifying potential blow-up stocks and it makes sense to check it once in a while to identify stocks to avoid or sell.

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At the time of publication, Melvin had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary | Energy | Stocks

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