Run From These Toxic Stocks

Hear that sound? [Cue the crickets.] That's what you hear when this company's operations take an abrupt nosedive as the market for their products gets whittled away to unprofitable levels.

A simple glance at Weyerhaeuser's (NYSE: WY  ) third-quarter earnings will not suffice, since the sale of its containerboard, packaging, and recycling segments to International Paper (NYSE: IP  ) helped lift net earnings to a 177% increase over prior-year levels. Excluding all one-time items, though, this 108-year-old company lost money on the quarter ... and things are only looking worse going forward.

Pre-tax earnings contracted across every operating segment, with the wood products and real estate divisions posting enormous losses. Lower sales volumes led the wood products segment to a $146 million loss. Heading into the typically slower fourth quarter, the company expressed no optimism for the near-term outlook, and expects even greater losses for the fourth quarter.

As for real estate, asset impairments of $235 million drove the segment to a $316 million loss for the third quarter. That news alone would be reason enough to steer clear of this company for a while, but management expects home prices to fall still further and anticipates more substantial losses in the fourth quarter.

There are only so many negative words in the English language, and I think most have already been used to describe the state of the housing market. Weyerhaeuser's outlook is weyery bad, but smaller competitor Louisiana-Pacific (NYSE: LPX  ) posted an even wider loss of $111 million on this election day. Wallboard manufacturer USG (NYSE: USG  ) faces a possible violation of a lending agreement as the housing slump has crushed earnings and dragged shares to 87% below their 52-week high. Shares of the once-mighty Cemex (NYSE: CX  ) are down 75%, and Fitch recently downgraded the company's issuer default rating to junk status. Even as I write this, Fitch just announced a downgrade of Weyerhaeuser's rating to just above junk status, citing the likelihood of challenging business conditions into 2010.

The moral of the story is: Run as far away from the homebuilding and related materials sectors as fast as your Foolish feet will take you. Not even a move to REIT status as Rayonier (NYSE: RYN  ) and Plum Creek Timber (NYSE: PCL  ) have done would assuage my misgivings about Weyerhaeuser here. This is a fundamental bear market for housing, and the sector must be avoided until the trend reverses.

Further Foolishness:

The Lumber, Wood Production tag in Motley Fool CAPS lists 13 companies. Join the free online community of talented investors today, and help warn fellow Fools about the prevailing weakness in this sector.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns no shares in the companies mentioned. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (16)

Comments from our Foolish Readers

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  • Report this Comment On November 04, 2008, at 10:50 PM, papabagh wrote:

    Run as fast as you can from the aptly named Fools and their their toxic recommendations.

    Just weeks ago they were intoxicated with CEMEX and it was a recommended buy. They are not market experts. They are marketing hucksters.

  • Report this Comment On November 04, 2008, at 10:58 PM, utilajeff wrote:

    I was a Motley Fool Stock Adviser subscriber until a couple of weeks ago. Definitely no advice to sell CEMEX up until my subscription ran out. Does this author recommend that we who own the stock cut and run? CAPS strongly rates this stock as outperform. What gives? I'll ride out the storm with my shares of CEMEX.

  • Report this Comment On November 05, 2008, at 12:12 PM, XMFSinchiruna wrote:

    Hi guys,

    The whole financial world changed in September in ways that force a fresh evaluation of every equity out there. We writers are not part of the subscription services, and these are simply one Fool's view on the group. I looked closely at shares of Cemex a couple of months ago and thought they looked like a great buy at those levels, but again the extent of the financial crisis as it has since unfolded makes everything subject to fresh analysis. I believe the housing sector in the U.S. has some considerable time to go before a meaningful recovery can take place, but Cemex is a global supplier, so if China and other emerging markets rebound faster than some are now fearing, USG and CX could find a little relief.

    Following a massive equity sell-off marked by forced liquidations and panic selling, I believe several sectors are due to mount a meaningful recovery. Given what we now know about the severity of the housing crisis in the U.S. and Europe, I simply feel that equities with exposure to these housing markets may have a tougher time recovering than some other sectors. Nonetheless, these are large companies with long histories, and I would not want to dispel all hope that one or more of them could find a way to profits while we await the housing recovery.

    I feel your pain with respect to being down with these shares. If you check my CAPS profile you'll see I've plummeted from the top one percentile to the bottom 2 percentile just since the commodities correction began in March. Most everything I own is in the red, and personally I have decided to stay long until commodities rebound. I can not advise anyone on whether to buy, sell, or hold, but I feel your pain and assure you that I/we are not 'marketing huksters'.

    I write these articles out of a deep desire to share information and my own thoughts on given companies with my readers, in hopes that they will find the information useful in performing due diligence.

  • Report this Comment On November 09, 2008, at 12:54 PM, Aubear1 wrote:

    I am totally unimpressed with Motley Fool (and the entire financial services community for that matter) and the "research" that you guys provide. USG was one of your value fund recommendations when the housing market started to tank last spring and now it's one of your "Toxic Stocks" to avoid. I find it interesting that no one on your value team staff had the ability to see a further deterioration in the housing market with all of the obvious signs. I would have been out of business years ago if I advised my clients like this.

    If you are going to build a business on the shortcomings of traditional brokerage firms, then you really need to get your core business right.

  • Report this Comment On November 10, 2008, at 7:01 PM, yanalevin wrote:

    I agree with Aubear1. Only a month ago USG was your "inside value" team recommendation and now it's a "toxic stock" to avoid... Should I sell this stock now? Or should I hold thinking long long long term?

  • Report this Comment On November 11, 2008, at 10:13 AM, stupy1 wrote:

    I agree with Aubear1 and yanalevin, I have been a inside value subscriber for 3 years and this is really upsetting how you guys don't represent a unified voice. USG should not have been in this article or Inside Value should have recommended it as a sell. One or the other. I trust the guys at Inside Value more than I trust some columnists so I'm going to listen to them, but even so this is just not right.

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