Two out of every three stocks lost ground today, as pressure applied by Federal Reserve Chairwoman Janet Yellen's testimony before Congress today was too much to bear. Although she indicated that interest rates would remain low into the foreseeable future, she also questioned the lofty valuations of some stocks -- those in the biotech and social media industries in particular. None of today's three worst performers hail from those areas, but they each managed to perform horribly all the same. Lorillard (LO.DL), Michael Kors (CPRI -2.72%), and Reynolds American (RAI) ended the day as the three worst stocks in the S&P 500 Index (^GSPC -0.58%). The S&P also lost ground, falling 3 points, or 0.2%, to end at 1,973.
Lorillard took a 10.5% plunge on Tuesday after reaching a $27.4 billion deal to sell itself to one of its biggest rivals, Reynolds American. Although the sale values Lorillard's stock at $68.88 per share, investors sold the company to almost the $60 level Tuesday. The sell-off makes more sense the more you know about the deal, which is, according to Lorillard's CEO Murray Kessler, "one of the most complex deals ever attempted in corporate America." Even though careful precautions were taken to skirt around possible antitrust lawsuits from the U.S. government, there's still a risk that the deal won't go through. And if it does, Lorillard shareholders may be getting the short end of the stick, as one Wells Fargo analyst thinks shares are worth at least $72 a pop.
Michael Kors stock continued to plunge on Tuesday, falling 7.3% today. Shares of the luxury fashion retailer have now lost more than 10% in the last two days, as a cautionary blurb in the Wall Street Journal on Sunday sent investors scrambling for the exits. The sell-off accelerated today as a handful of Wall Street analysts lowered price targets and issued warnings of their own on the stock. The concern is that Michael Kors' wholesale operations will drive its margins down and make it go the way of its beleaguered competitor, Coach. None of these bears seem to recognize the fact, however, that the booming popularity of Michael Kors played a leading role in Coach's fall from grace.
Image Source: Reynolds American
The last of today's laggard, Reynolds American, dropped 6.9% today on the news of the Lorillard acquisition. It's not unusual for shares of an acquiring company to fall after they announce a buyout, but with the Lorillard deal comes a healthy dose of unique risks. Moody's put both companies on ratings watch, noting that the massive acquisition would likely necessitate a downgrade to Reynolds' debt. On top of that, Reynolds will sell its highly popular e-cigarette brand blu to Imperial Tobacco Group in a desperate effort to avoid antitrust litigation and maintain a semblance of healthy competition in the U.S. market.
