Weeding isn’t just for gardens.
I recommend that investors weed their portfolios at least once a year.
Since the United States faces a recession – a stiff one, in my view – this is a good time to look at your holdings and weed out companies that have high debt, or are losing money, or both.
To be sure, such companies sometimes turn themselves around, and riding a turnaround can pay off handsomely. But in my judgment, this is no time for such brave tactics. This is a time to be a bit more conservative.
Here are four stocks whose shares I would ditch now.
Apollo Global
Leon Black, who founded Apollo Global Management Inc. (APO, Financial) in 1990, is one of the most best-known private equity investors in the U.S. Before he started Apollo, he was head of mergers and acquisitions at Drexel Burnham Lambert, a prominent brokerage firm until it collapsed in 1990.
Among Apollo’s dozens of investments have been CEC Entertainment (parent to Chuck E. Cheese), the University of Phoenix (for-profit colleges) and Tech Data Corp. (TECD, Financial). Black and his colleagues seem eager to buy distressed assets during the Covid-19 bear market.
However, when I look at Apollo’s balance sheet, I am a little distressed myself. Long-term debt has jumped to $9.6 billion from $3.5 billion. The debt-to-equity ratio towers at 17.6 to one. The firm lost $996 million in the first quarter, a loss bigger than any annual profit in the past 15 years.
Carvana
Carvana Co. (CVNA, Financial), out of Tempe, Arizona, has a good concept. It operates an e-commerce platform on which you can buy or sell a used car. Potential buyers can look at a car from every angle, get financing, buy a warranty and arrange for delivery.
I like the concept, but not the stock. Public since 2017, Carvana has reported its results back to 2015. It has never made a profit. Losses have mostly been growing, rather than shrinking.
Fans will say that the company is scaling up, and there will be a big payoff later. Maybe, but they are paying for it in advance: The stock sells for 108 times book value (corporate net worth per share). As of March, debt is 45 times stockholders’ equity.
MongoDB
Based in New York City, MongoDB (MDB, Financial) sells database software. It has a big following because it’s grown rapidly. But valuations are sky high -- 26 times revenue and 135 times book value. (There are no earnings yet.)
I notice that 10 Wall Street analysts have suspended their coverage of Mongo recently. Only seven remain, and most rate it a “hold.” I’m not sure what the coverage exodus means. It could be that Wall Street firms expect a new stock or bond offering, and are competing to manage it.
TerraForm Power
TerraForm Power Inc. (TERP, Financial) operates solar and wind power generating installations in the U.S. and half a dozen other countries. It reported profits in 2012 and 2018, but losses in all the other recent years.
Enthusiasts for solar and wind will always give this stock a base of support. But so far, long-term holders haven’t been rewarded. The stock is down 35% over the past five years, while the Standard & Poor’s 500 Index is up 48%.
Terraform appears to be straining to pay the interest on its debt. Total debt is well over $6 billion, with $78 million in interest last quarter, when the company reported a $55 million loss.
Past record
So far as I know, I am the only U.S. stock market commentator who systematically reports the results – good or bad – of past recommendations. If I didn’t report the bad, no one would believe the good.
A year ago, I recommended selling four stocks. Federal National Mortgage Association (FNMA, Financial), better known as Fannie Mae, fell 47%. Coca-Cola Consolidated Inc. (COKE, Financial) (the bottler, not the soft-drink maker) dropped 27%. And Irridium Communications Inc. (IRDM, Financial) declined 20%.
However, Five9 Inc. (FIVN, Financial), a software company, returned 114%. As a result, my picks averaged a 7.2% gain, compared to 2.3% for the Standard & Poor’s 500 Index.
It’s a similar story long-term. Beginning in 2000, I’ve written 12 columns featuring sell recommendations. The stocks I disdained have advanced 12.9% in 12 months on average, versus 10.2% for the index.
One stock in 2005 -- Hanson Natural Corp., now known as Monster Beverage Corp. (MNST, Financial) – more than quintupled, swinging the overall results from favorable to unfavorable. If I had never opened my mouth about Monster, my sell recommendations would have beaten the S&P by more than five percentage points a year.
Bear in mind that my column recommendations are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
Disclosure: A hedge fund I manage owns put options on Carvana.
John Dorfman is chairman of Dorfman Value Investments in Newton Upper Falls, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at [email protected].
