There's no better time to take a good hard look at your portfolio than the beginning of a new year.
I know this may not be your first rodeo and chances are you've already done at least a little thinking about how your investments came through 2011, and what you'd like to achieve in 2012.
If not, there's no time like the present.
Especially when it comes to something I call "Ditching the Dogs," which is a variant of the well-known and very popular "Dogs of the Dow." You've probably already guessed from the name that I'm talking about unloading those investments that have underperformed, or which are likely to hold my portfolio back in the next twelve months.
Obviously this is a highly personal process and every investor is different, but here are five stocks I'd avoid like the plague right now (and the reasons why):
1. Sears Holdings Corp. (Nasdaq: SHLD) – Long a bastion of American retailing success, I've been leery of the company for a long time. In fact, I've steered clear of it since hedge fund investor Eddie Lampert used more than a little financial wizardry to create Sears Holdings. At the time, his goal was to tap into the vast real estate empire underlying Sears and subsequently K-mart when that company emerged from bankruptcy and he snapped up shares. The stock hit $190 a share in early 2007 on the assumption that it would.
Now, though, it's a very different story. With real estate in the toilet and the value of his "collateralized" debt circling the drain, he plans to fire employees, cut more than 120 stores and sell property. Same store sales are down sharply as is profitability. Fitch Ratings Inc. has cut the company's bond to junk status, and it's likely to have hundreds of millions in writedowns ahead. I think the company is going to restructure, and net income is going to fall to the tune of billions when now-litigation conscious accountants have their day.
2. Research in Motion Ltd. (Nasdaq: RIMM) – Once the darling of connectivity and a status symbol for the cognoscenti, RIMM's share of the smartphone market continues to evaporate like fog on a hot morning. I recommended shorting the company a few years back but was early to the party on several occasions; somehow the stock seemed to fight back. The stock is down 89.52% from its peak of $144.56 in early 2008 and up a creek without a paddle…and you know which creek I am talking about.
Dual Chairmen and CEOs Mike Lazardis and Jim Balsillie, who are also co-founders by the way, couldn't fix things, and with iPhone and Android users on the rise, I don't believe they will. Long-term government contracts prized for their encryption and steady cash flow are falling by the wayside. Small businesses are dropping the company like hotcakes because of the constant updating, technical complexity and brain damage – mine included. We switched to Droids more than a year ago and have never looked back. The technology has simply had its day, and this is yet one more innovator that's about to head into the sunset. They'll be lucky to find a buyer.
3. Eastman Kodak Co. (NYSE: EK) – Speaking of sunset companies, it doesn't get any more painful than this. Having become nearly synonymous with the photographic industry itself, Kodak is truly on "death watch" having dropped to a mere $0.4001 and a total market cap of only $108.01 million as of Monday's close. Rumors are flying about bankruptcy filings. Three board members have hit the eject handle in the past two weeks. And earnings…well there aren't really any to speak of.
Hopelessly outclassed by the digital world, I think the brand belongs in a museum. The company has very little to pin its future on save the sale of more than 1,100 digital imaging patents and patent-related lawsuits aimed at harvesting earnings from those who – in Kodak's opinion – quite literally have stolen them including Apple Inc. (Nasdaq: AAPL) and Research in Motion. The former is understandable. The latter is itself on death watch, so this is like squeezing blood from a turnip.
The one shining star, if there is one to be had, is that the value of those patents may be $2 billion to $3 billion; however, that's a Pyrrhic victory in my opinion. The company doesn't appear to have the cash necessary to survive the judicial process. But, if you want a flyer, that's about how this one should be evaluated — and then only with money you can afford to lose.
4. Microsoft Corp. (Nasdaq: MSFT) – It looks cheap, as usual. I remember growing up in Seattle when the company occupied just one tiny corner segment of an office park in Bellevue. And I recall the initial public offering (IPO) all too well – because I passed on it in one of the biggest mistakes of my investing life. I've owned Microsoft off and on over the years and have been pleased, but I wouldn't buy it again today.
The company is stuck in the $20 range, and has been since 1998 if you're not counting the dot.bomb years when it rallied to nearly $60 before flat-lining again. Over the past ten years, the company has returned little more than 10% versus the Standard & Poor's 500 Index, which has posted more than a 36% gain including dividends.
The problem, as I see it, is not that the company's core products don't work – they do. But they can't seem to figure out who they are, which seems more than a little futile to me given that Microsoft has outspent Apple 10:1 over the ten years. Still, it's been outclassed, outmaneuvered and out-innovated at every turn. An appealing 2.4% dividend just doesn't warrant trapping my money for years to come when the company is sitting on a $55.94 billion cash hoard, according to Yahoo! Finance.
5. Facebook Inc. (and almost any other social media company) – Many people think I'm a Luddite or some sort of curmudgeon for saying this. To be fair, I'm probably a little of both. But there is no way that a company like Facebook is worth the $50 billion-$100 billion being batted around. Well, not to anybody other than Goldman Sachs Group Inc. (NYSE: GS) and their private investment clients who invested via a highly anticipated "private" IPO last year, let alone the public IPO when it hits.
The company has the same old problem salesmen the world over have – monetizing eyeballs. Sure there's a tremendous amount of marketing data, and the biggest single voluntary collection of people in recorded history using it, but that doesn't necessarily translate into revenue — nor does it equate to value. Tire kickers don't spend a lot of money.
Don't get me wrong. I like Facebook. It's innovative. It's created an entirely new form of communication that's quite literally revolutionary. And I can't help but admire the fact that the company has more than 800 million users, more than 50% of which log on in any given day. But when push comes to shove, Facebook will have to struggle to keep people interested in a never-ending race against "freemium" apathy.
Perhaps there's a MySpace posting about this somewhere…
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.