It is the usual practice to see soaring stocks bite the dust when there is a market correction happening. While it may not be true for most of the cases, this policy holds true for at least 10% of the cases. As an investor, you must be careful while investing in these stocks because it is quite unpredictable as to when these stocks would come crashing down and when they would reduce or stop giving you returns. In these lines, let us now see two stocks that are expected to witness a slump this year when the market corrects itself.
Online retailers eating away market share
One sector that has been affected severely in the last few years due to the dominance of e-commerce players is the teen retail segment. The first stock that we are expecting to witness a slump this year due to market correction is Aeropostale (ARO, Financial). In the last five years, the retail index of S&P 500 grew by 160%, whereas Aeropostale lost 60% of its market share. Of the many reasons that affected the company’s performance, the most important one was the dominance of the online store, Amazon (AMZN, Financial).
As there were announcements that this company would post smaller losses for the first quarter of 2015, investors started feeling positive and the share prices reported a total increase of about 65%. The company had forecasted its losses at around $0.25 to $0.31 per share; however with share price increase, now losses are expected to be in the range between $0.01 and $0.06 per share. Reduced losses notwithstanding, Aeropostale is looking at a very dark road ahead as sales and revenues are seeing a decreasing trend. The company has reported losses recently for the 8th quarter in a row. Future of same store sales is also looking bleak as this segment has reported undue losses. By 2016, the company is looking to shut down 365 shores or around 40% of its outlets and this is more than enough clue that the company is all set to come crashing down in the near future. The trend of share price is seen below:
Decreased tobacco demand spell trouble
The Altria Group (MO, Financial) maybe the market leader in the tobacco sector currently, but the future is not looking great for the company. This company is a perfect example of one of the stocks that needs to be watched out for when share prices soar unusually high. When the increase in share prices is not accompanied by a corresponding increase in revenues, this could mean real trouble for any company. Altria is no exception to this rule. Over the last five years, revenues of the company had increased by a meager 0.13% (compounded annual rate). The revenues for 2012, 2013 and 2014 were $24.6 billion, $24.4 billion and $24.5 billion respectively. However, for 2015, Altria is involved in a serious business structuring in the form of cost cutting and repurchases, through which revenues are expected to grow at a compounded annual rate of 6%.
The company would find it difficult to sustain this growth for a long period of time, because it can cut costs only up to a certain extent. The problem of decreased demand for its famous Marlboro cigarettes is looming large on the company’s financials. Though Altria has come up with alternative products like nicotine gums, chewable tobacco products and e-cigars, diversified its nature of business to include winery and a stake in SABMiller Plc and other initiatives, the company is still at a crossroads as far as its future is concerned. This is because almost 90% of its revenues come from Marlboro cigarettes! Hence the 88% increase in share prices over the last 3 years is all set to come crashing down when the market correction happens this year. Following is the trend of share price movement for the company for the last few months.
Conclusion
These two companies are proof that investors should never make their investment choices based on share prices or earnings alone. The two should complement each other. Over a period when revenues get stagnant but share prices go on increasing, the growth will be short-lived. These kinds of companies will suffer a lot when market corrections happen. Hence investors should know when to get in and get out of these stocks so as to avoid huge financial losses.
