The U.S. stock market witnessed multi-year record gains in 2013, but the trend has taken a U-turn at the beginning of 2014 with unsupportive economic data. Things turned no better after we concluded the first month of the year. In fact, benchmarks’ downward movement has picked up of late: the Dow, S&P 500 and Nasdaq not only had to suffer from issues at home, but emerging markets and China have routed the domestic indices.
Amid this scenario, a little caution can do investors a lot of good. Economic events or numbers may fail to restrict the downtrend, but investors can jump to precautionary action to ensure a secure portfolio. We will pick some stocks that are likely to see further downside; thus it is an ideal time to trim them from your portfolio.
Before we discuss the way of doing it, let us look at what has been happening to the benchmarks’ graphs and the causes.
Indices Remain Weak
The beginning of 2014 witnessed three consecutive days of losses that led the S&P 500 to its worst start to a year since 2005. A fourth consecutive decline would have ensured the worst start to a year since 1978.
The sell-off intensified in the last couple of weeks of January and S&P 500 had closed with weekly losses for three straight weeks. For the week ending Jan 24, the Dow had its worst weekly loss since 2011 and the Standard & Poor 500 suffered its worst weekly percentage decline since June 2012.
For January, the blue-chip index plunged 5.3%, the S&P 500 was down 3.6% and Nasdaq ended the month with 1.7% decline. This was the blue-chip index’s worst start since 2009.
“Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.”
That is what the Federal Open Market Committee’s latest policy statement had to say. The central bank, as anticipated, trimmed its economic stimulus plan by another $10 billion after announcing the same in December.
The central bank has chosen to reduce its stimulus while economic numbers were looking promising. However, many other factors narrate a gloomy tale and the current earnings season also looks less promising.
In an evolving post-QE world, domestic markets had to face the angst of foreign factors too. It came in the form of contraction in China’s manufacturing activity and the slump in emerging market currencies.
As for the events in the world’s second-largest economy, the HSBC preliminary survey showed a contraction in China’s manufacturing sector. The “flash” HSBC/Markit China manufacturing Purchasing Managers’ Index dropped to 49.6 in January from 50.5 in December. Separately, Chinese economy was reported to have advanced at 7.7% in Oct-Dec last year, lower than the prior quarter’s growth of 7.8%.
Emerging market currencies suffered their worst sell-off in five years. Argentina’s peso had its worst fall since 2002. A threat to the stability of the government in Turkey has seen its currency hitting record lows of late. Separately, hryvnia, Ukraine’s currency, dropped to a four-year low. South Africa’s rand saw itself weakening beyond 11 per dollar for the first time since 2008.
Stocks to Remove from Your Basket
Here we will list 5 stocks that may witness further downside. These stocks – each with a Zacks Rank #5 (Strong Sell) – have also witnessed downward estimate revisions by at least 10% over the past few weeks. Moreover, each of these stocks has slid over 10% in the last four weeks.
SodaStream International Ltd. (SODA - Snapshot Report) – This Israel-based developer and seller of home beverage carbonation systems commands a global leadership position in the home beverage carbonation market. The company’s latest net income projection for 2013 shows a 5.5% decline as compared to prior projection of a 23% jump.
Estimate Revision – SodaStream has seen 3 negative revisions in the last 30 days for both the current quarter and current year estimates. Quarterly earnings consensus has slumped from 64 cents a share to just a penny now. Yearly earnings consensus has dropped from $2.57 a share to $1.94.
Share Price – The stock has lost 24.0% over the last four weeks.
Natural Resource Partners LP (NRP - Analyst Report) – The company leases reserves to mine operators in exchange for royalty payments. Headquartered in Houston, this company does not mine minerals or natural resources itself. The company had announced earlier in January a fourth quarter 2013 distribution of $0.35 per unit, which is a 36% decline from the third quarter.
Estimate Revision – The company has seen 2 negative revisions in the last 30 days for both the current quarter and current year estimates. Quarterly earnings consensus dropped from 34 cents a share to 32 cents over the same time frame. Yearly earnings consensus has also dropped from $1.46 a share to $1.44.
Share Price – The stock has lost 21.4% over the last four weeks.
Datawatch Corporation (DWCH - Snapshot Report) – The software products developer and marketer offers visual data discovery solutions. In addition, it offers business service management solutions and educational services like training partners. The company recently reported fiscal first quarter 2014 net loss of 66 cents per share, wider than year-ago quarter’s net loss of 3 cents per share.
Estimate Revision – Datawatch has seen 1 negative revision in the last 30 days for both the current quarter and current year estimates. Quarterly estimates dropped from earnings of 9 cents a share to loss of 16 cents now. Current year earnings estimate slumped from earnings of 21 cents a share to loss of 69 cents.
Share Price – The stock has lost 18.4% over the last four weeks.
Cabot Microelectronics Corporation - This key player in the Semiconductor industry is a leading supplier of slurries used in chemical mechanical planarization, a polishing process used in the manufacturing of integrated circuit devices. The company has a trailing four quarter earnings surprise of a negative 2.8% and had missed the Zacks Consensus Estimate for earnings by 26.2% in its last reported quarter.
Estimate Revision – The company has seen 1 negative revision in the last 30 days for both the current quarter and current year estimates. Quarterly earnings consensus dropped from 56 cents a share to 38 cents over the same time frame. Yearly earnings consensus has dropped from $2.56 a share to $2.04.
Share Price – The stock has lost 10.9% over the last four weeks.
Ruby Tuesday, Inc. (RT - Snapshot Report) – The popular restaurant operator owns a chain of casual dining restaurants in the US and in foreign locations. Founded in 1920, it operated 779 Ruby Tuesday and Lime Fresh locations as of Dec 3, 2013.
Estimate Revision – The company has seen 4 negative revisions in the last 30 days for the current quarter and 5 negative revisions for current year estimates. Quarterly loss estimates dropped from 1 cent to 6 cents a share in the same time frame. The yearly consensus estimate widened from loss of 49 cents to loss of 84 cents now.
Share Price – The stock has lost 19.8% over the last four weeks.
Negative market correction has been strong in the Street and the Fed will most likely continue its tapering. No matter the direction of the benchmarks going forward, it will be a prudent move to get rid of these stocks now.