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These 3 Stocks Could Prove Toxic to Your Portfolio

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These two retailers and an offshore drilling stock could cause investors to lose a lot of money.

Some industries just can't compete with changing trends. Take retailers and offshore drillers, for example, which are struggling to contend with the lower-cost technological innovations of e-commerce and shale drilling, respectively. Because of that, companies in these industries are seeing their sales and profits sink, which is taking their stocks down as well. We don't see either trend going away anytime soon, which is why stocks in these sectors could prove toxic to your net worth. Three stocks that we think could be particularly harmful are Stage Stores (SSI), Target (TGT 2.46%), and Seadrill (SDRL). Here's why.

Little hope for this retailer

Daniel Miller (Stage Stores): If you're looking for a group of toxic stocks that will almost certainly erode portfolio wealth, brick-and-mortar retailers are largely struggling. One that seems to be in a perpetual roller coaster ride down, minus the entertainment factor of an actual roller coaster, is Stage Stores.

SSI Chart

SSI data by YCharts.

For those that don't recognize the company name, Stage Stores operates roughly 800 specialty department stores that sell moderately priced apparel, accessories, footware, home goods and cosmetics in 38 states -- and it, like many retailers, is having trouble differentiating itself from competitors and isn't gaining much traction in e-commerce.

In addition to little online traction, Stage Stores' comparable-store sales dropped 8.5% during the fourth quarter, and it expects 2017 losses per share to check in between $0.95 and $1.55, gloomier than the consensus of a $0.35 loss per share. The company is also facing macroeconomic headwinds due to 40% of its store count being located in Texas, Oklahoma, Louisiana, and New Mexico, which have been hit with lessened consumer activity amid a plunge in oil prices and a weakening peso.

If investors decide to hop on shares of Stage Stores, it's a gamble that management will be able to increase its e-commerce sales, invigorate its merchandise with a focus on cosmetics/beauty, recover its merchandise margin, improve its marketing to target peak shopping periods, and fund store remodels while cutting costs. That seems like a daunting uphill battle for the company and its investors, and after its top line has declined over the past few years, it's too toxic for most portfolios to risk.

Investor looking at a bad chart.

Image source: Getty Images.

Empty aisles

Demitri Kalogeropoulos (Target): Target shares are cheaper than they've been in years, but I still wouldn't be rushing out to buy stock in this leading national retailer. Sure, it's a dividend powerhouse, having raised its payout for over 25 consecutive years. The current yield is a market-crushing 4.2%.

However, operating results are going from bad to worse right now. Comparable-store sales declined last year following a brutal holiday season that saw customer traffic slump by almost 2%.

None of Target's traditional strengths appear to be protecting its business as consumers shift spending online. The digital sales channel, for one, isn't driving enough growth to offset declines at its stores. Meanwhile, Target's signature categories such as housing and apparel aren't delivering market share gains or higher profits. The retailer's gross margin fell by a full percentage point over the holidays to 27% of sales.

Target is planning a strategic pivot that includes what management described as "invest[ing] in lower gross margins to ensure we are clearly and competitively priced every day." In other words, the retailer will be cutting prices so that it can better compete against online rivals and discount-focused peers. The problem is that many other retailers can achieve rock-bottom prices at a higher profit margin. Target just isn't as well-equipped to fight in that segment of the industry, and every step it takes away from its core business model risks compounding its sales and profit growth struggles.

The dreaded "B" word

Matt DiLallo (Seadrill): Things have gone from bad to worse at Seadrill. The offshore driller had hoped to work quickly with creditors to shore up its balance sheet so that it would be able to survive the currently challenging conditions in the offshore drilling market. However, those negotiations have taken much longer than expected due to the complexity of the company's financial situation.

In fact, things have taken so long that Seadrill is running out of time to address its financial woes before the lending facility on one of its rigs matures next month. With that deadline fast approaching, the company warned that it might have no choice but to file for bankruptcy protection. That said, even if it avoids that fate, existing investors face the risk of "substantial dilution" should the company convert debt into equity to reduce leverage.

Furthermore, even if Seadrill does come to an agreement with creditors that keeps it afloat, it will be quite some time before its operations start to improve. That's because "available work is fiercely competitive with drilling contractors bidding below cash breakeven in some instances in order to keep rigs active," according to the company. One of the driving factors behind this competition is that oil producers are pouring more money into lower-cost shale drilling instead of offshore sources. That trend might not reverse until 2018, and that's only if oil prices march higher.

It is possible that Seadrill will make it through the downturn and eventually create value for investors when offshore drilling finally rebounds. As a long-suffering shareholder myself, that's certainly my hope. However, with a lack of palpable financing options at its disposal, there's a growing risk that the stock might never recover. 


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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
$150.42 (2.46%) $3.61
SeaDrill Limited Stock Quote
SeaDrill Limited
Stage Stores, Inc. Stock Quote
Stage Stores, Inc.

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