With the stock market down 18% from its peak as of May 20, now is a good time for a portfolio upgrade.
You can weed out losing holdings and get a tax deduction on your 2022 tax return. With the proceeds, you can buy first-rate replacements at prices well off the highs.
In this week’s column, I’ll talk about five stocks I recommend selling. Next week, I’ll give five buy recommendations.
Zscaler Inc. (ZS, Financial), based in San Jose, California, offers cloud-based systems to help companies improve their internet security. It was a hot stock for more than three years, topping out at $350 a share in November 2021. Then a slide began that so far has taken the shares down to about $137.
In my opinion, that’s still way too high. The price is 147 times the earnings analysts forecast for fiscal 2023 (the 12 months through July 2023).
Like many trendy companies of the past few years, Zscaler has grown its revenue rapidly, but shown no earnings on a GAAP (generally accepted accounting principles) basis. When the market was going up, investors were OK with that. Now that fear is replacing greed, it’s a different ballgame.
Splunk Inc. (SPLK, Financial) is a play on the internet of things, since it monitors and analyzes data from machines. It used to offer software as a service for this purpose, but is transitioning to a cloud-based platform. As with many software companies, the transition hasn’t gone smoothly.
This one, too, is heavy on revenue growth, light on profits. The stock sells for 28 times estimated fiscal 2025 earnings, which is a lot. Rising interest rates could also pose a threat to Splunk, which has $3.3 billion in long-term debt.
Based in June Beach, Florida, Next Era Energy Inc. (NEE, Financial) is two companies in one. It has a regulated utility, Florida Power and Light. And it has an unregulated renewable-energy business, generating electricity by solar and wind, and selling it throughout the U.S. and Canada.
The regulated utility generates more than half of the company’s earnings.
Although fans see it as a company of the future, NextEra hasn’t generated much growth. Its revenue growth over the past five years has been 0.4% per year, while earnings have shrunk.
Its return on invested capital last year was less than 5%. I like to see 10% and above. Of course, the pandemic has been bad for commercial real estate, since lots of people are working from home.
Sadly, though, Boston Properties’ return on capital has been below 6% for 13 straight years now.
According to GuruFocus, of 298 companies in the biotechnology industry, Alnylam Pharmaceuticals Inc. (ALNY, Financial) has the worst ratio of debt to Ebitda (earnings before interest, taxes, depreciation and amortization).
In the stock’s defense, the company also has oodles of cash – enough to pay off the debt twice over. But young biotech companies often burn through a lot of cash.
Alnylam has posted a loss for 15 years in a row, and the losses in the past three years have exceeded $800 million each year.
My sell recommendations from a year ago posted an average loss of 14.2%, thanks mostly to a big drop in TG Therapeutics Inc. (TGTX, Financial). For comparison, the Standard & Poor’s 500 Total Return Index fell 5.73%. The figures are total returns, taking dividends into account.
Brown-Forman Corp. (BF.B, Financial), Simon Property Group Inc. (SPG, Financial) and Mondelez International (MDLZ, Financial) also posted losses, though Mondelez beat the index. Defying my warning, Tivity Health Inc. (TVTY, Financial) and Procter & Gamble Co. (PG, Financial) posted gains.
This is the 15th column I’ve written on sell recommendations. Because of poor picks I made in 2005 and 2010, the mean one-year return on my sell recommendations has been 13.7%, versus 11.3% for the S&P benchmark.
However, of the previous 14 columns, eight were successful, in that my sell recommendations performed worse than the S&P 500.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Stay tuned for buy recommendations next week. I don’t believe anyone can predict the market, but I suspect the market decline of the past four months is nearing its end. For certain, a lot of stocks are 15% to 30% lower than they were when the year started – and therefore more attractive.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].