While investing is inherently risky, some stocks just come with an extra helping of risk due to clearly visible financial troubles. That additional hazard is not worth the potential reward in our opinion, which is why there are certain stocks we steer clear of. Our Foolish contributors think investors would be crazy to own Hain Celestial (NASDAQ:HAIN), GNC Holdings (NYSE:GNC), and Cobalt International Energy (NYSE:CIE).
A supplement supplier in trouble
Daniel Miller (GNC Holdings): GNC Holdings is a specialty retailer of health, wellness, and performance products including vitamins and supplements for sports nutrition and diet. While it fills its stores with recognizable products, the company and its retail stores offer consumers little to no advantage to shopping at GNC, and thus offer investors little value with its stock.
Here are a few things to consider about the state of GNC's business. Not only has its stock shed a vast majority of its value since 2014 as its financial performance stalled, the company recently surprised investors by announcing it would suspend its dividend. If you look at GNC Holdings' forward price-to-earnings ratio, it trades at a paltry 4.6, which suggests the Street doesn't want to touch this stock with a 10-foot pole. Not only that, but at the end of January a significant 27% chunk of GNC's share float was sold short, and that was nearly 40% higher compared to mid-January.
Further complicating the company's potential rebound is its looming debt payment. GNC faces a large $1.16 billion principal payment in 2019, and while this might not break the company -- perhaps it even refinances the debt -- it certainly isn't going to make reinstating its dividend or funding a retail rebound any easier in the near term.
Personally, it doesn't seem like the sports supplement and diet industry is a bad place to invest, but GNC doesn't offer investors any competitive advantages on pricing, product, promotion, or placement. Without that, why would consumers choose GNC over online options or a slew of other brick-and-mortar stores? And because of that, why would investors choose GNC? The simple answer is: Don't.
There's nothing healthy about these shares
Brian Stoffel (Hain Celestial): I've written extensively about Hain Celestial -- a leading provider of organic and natural goods -- over the past year. In early 2016, I parted ways with my own shares in the company. I was concerned that the company's moat is deteriorating; organic brand names are simply too weak, and haven't proven themselves over time.
Those concerns took a back seat in August when the company announced that it was going to be unable to file its quarterly report on the heels of accounting irregularities. Management claimed these were relatively benign and only the result of the timing of revenue recognition from concessions granted to vendors. And in November, the company said it found no evidence of intentional wrongdoing.
But investor fears were stoked again in February when the company 1. once again said it wouldn't be able to file quarterly reports on time, 2. that it was widening the scope of its investigation, and 3. the SEC had opened a formal investigation into the company.
It's entirely possible that Hain will emerge unscathed from this scandal. It's equally possible that the company will be acquired, given the current climate within its industry. But there are simply too many question marks swirling around for me to put my money behind Hain right now.
The wrong approach
Matt DiLallo (Cobalt International Energy): In some ways, Cobalt International Energy has more in common with a biotech than an oil stock. The company was founded more than a decade ago but didn't produce a drop of oil until last year. That's because it decided to start by exploring for oil offshore to build an exploration and production company from the ground up. The problem with that business model is that offshore oil development takes a tremendous amount of time and money.
In fact, it took Cobalt so much time to produce a drop of oil that the entire industry landscape has changed dramatically. Today, shale drilling is where it's at, with drillers able to turn wells into production in a matter of months instead of the years it takes offshore. Overall, shale drilling is faster, cheaper, and carries less risk. For example, last year Cobalt had to write off its entire $149.9 million investment in an offshore prospect after the initial exploration well came up dry, which is money it could have used to drill more than a dozen low-risk, high-return shale wells. It was also money the company could ill-afford to lose given that is has been burning through cash because it doesn't generate much cash flow from its meager production.
The higher costs, lead times, and risks are just some of the reasons why many producers are deferring offshore investments, if not abandoning the space altogether. However, that's not an option at Cobalt, which plans to continue pressing on with its offshore development efforts. The problem is that the company needs billions of dollars to turn its remaining prospects into cash flow, which is capital it doesn't have at the moment. That likely means it will continue to pile on debt and dilute shareholders, which will keep up the pressure on its stock price. That's why this is one oil stock I wouldn't touch, even though the oil market appears to be on the upswing.