The current market outlook of JPMorgan Chase (JPM) is hardly upbeat. The report expresses lots of doubt about the oft-predicated earnings pickup in 2017. The report points out that you would need pretty substantial changes and improvements in the global economy to come close to hitting the expected 12%-to-14% level of earnings growth most analysts are forecasting. It is worth keeping in mind that coming into this year analysts were looking for double-digit growth in the back half of this year and now it would surprise me if earnings grew at all for the second half of the year.
Wall Street analysts are usually a pretty bullish bunch so when a major firm's research department turns negative on stocks it is probably a good idea of the rest of us to take notice. I am not a short-to-medium term trader, but if I were I would be running my patterns and statistics on stocks that were overvalued and were being sold by institutions and insiders.
I ran a screen this morning looking for companies where large institutional shareholders were taking money off the table. While insiders may have a lot of different personal reasons for selling, institutions sell for one reason and one reason only. They think they are getting a decent price and it is time to take some money off the table.
One such company is Extended Stay America (STAY) . The three firms that bought the company out of bankruptcy in 2010, Blackstone (BX) , Paulson & Co. and Centerbridge Partners each sold $70 million of stock in a recent secondary offering. They each still hold a substantial stake in the firm, but it appears they sold all that the market would take at this point. The shares sold for well below the 2013 IPO price, which is not exactly a show of confidence by the institutional shareholders. If they don't like the stock, I don't either, and I would avoid it. The shares pay a 5.5% dividend, but not even yield seekers have been able to drive the price higher, and that's a huge red flag.
My dislike of chain restaurants is pretty well known, and lately the shares in this group have not done well. The poor performance is probably why Hedge Fund Luxor Capital has been a big seller of its stake in BJ's Restaurants (BJRI) recently. The company owns 183 casual-dining restaurants in 23 states, and while business has been decent it is no secret that consumers are cutting back on dining out. Investor's Business Daily recently cited a report from RBC Capital Markets that said casual dining stocks are feeling pressure from grocery price deflation and could show disappointing comps for the rest of the year. One corporate officer has also been selling stock in the open market recently, so it is probably a good idea to avoid the stock right now.
I do think that education technology companies could be 100-to-1 stocks over the long term, but it looks like shares of one of them, Instructure (INST) , are way ahead of themselves. Shares of this education software company declined after its IPO but have recovered sharply and are now more than 50% above the original pricing. Two of the firm's venture investors, EPIC Ventures and Openview, have been aggressively selling shares recently, and it probably makes sense for individual investors to follow suit.
The company is not yet profitable and won't make money in 2017 either. Its learning management platform for academic institutions is an intriguing product and, at some point, with a better bottom line and much lower share price I might be interested. But it is way too soon to be a buyer of this stock. The market is pricey right now, and avoiding mistakes is as important as finding winners.
Avoiding stocks where large shareholders are selling is one way of identifying stocks that have the potential for substantial declines if the market starts to fall.