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2 Horrible Stocks for Retirees

By Tim Brugger - Dec 7, 2017 at 8:48AM

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If you're an older investor in search of relative stability, Qualcomm and Palo Alto Networks don't belong in your portfolio.

Some investors are more comfortable than others when it comes to risk. However, many retirees prefer stocks less likely to suffer from the wild price swings that commonly plague companies with lingering issues or poor financials.

Two stocks that are particularly bad choices for retirees have taken shareholders on a roller coaster ride in the past year -- and they'll likely continue to in 2018: Qualcomm (QCOM -1.91%) and Palo Alto Networks (PANW 0.43%).

In the case of chip leader Qualcomm, though it does offer a tempting 3.5% dividend yield, it is haunted by lingering legal and acquisition-related questions.

Palo Alto Networks, on the other hand, is a horrible stock for retirees for entirely different reasons. Ongoing losses are the norm for the cybersecurity provider, and that won't change anytime soon. Results showing top-line growth have given Palo Alto stock short-term boosts, but the price always came crashing back down to Earth shortly thereafter.

Digital picture of a wildly fluctuating stock chart.

Image source: Getty Images.

Too many questions, not enough answers

Given time, it's likely that Qualcomm's ongoing legal issues with longtime customer Apple and the Federal Trade Commission (FTC) will eventually be settled. Qualcomm shelled out $2.65 billion in fines last fiscal year to settle a few other conflicts, but more fines are looming in 2018.

As if Qualcomm's courtroom battles haven't raised enough angst among shareholders, there are also unanswered questions surrounding its stalled $38 billion acquisition of Internet of Things (IoT) provider NXP Semiconductors, and a hostile takeover bid from Broadcom.

The uncertainties surrounding Qualcomm have fueled wild price swings over the past year. Shares have hit a 52-week high of $70.24, but have also been as low as $48.92. And after all the oscillations, Qualcomm stock is valued about where it was a year ago.

Meanwhile, Apple and another licensee have been withholding royalty payments on Qualcomm patents while their disputes with the company rage on, a situation that has it where it lives. Qualcomm's licensing revenue is far and away its leading growth driver, but last quarter's $829 million in licensing earnings before taxes (EBT) was down a staggering 48% year over year. That accounted for 68% of total EBT in Q4, down from 84% a year ago. Over the long haul, Qualcomm will likely find its way. But for retirees in search of relative stability, best to look elsewhere.

Picture of a business man precariously close to causing a large structure of wood blocks to come tumbling down.

Image source: Getty Images.

Predictability isn't always a good thing

Reliability may seem like a positive attribute in a stock, particularly for retirees. Unfortunately, in Palo Alto's case, those predictable quarterly financial results, and inevitable jump in value that follows each quarterly report, come with a price.

The "price" Palo Alto shareholders have paid the past year has been a stock that has seesawed by 47%, from as low as $107.31 a share to as high at $157.66. Why? The answer to that speaks to its predictability.

Consider last quarter: Palo Alto set  another revenue record in its fiscal Q1 of $505.5 million, above its own guidance as usual. The pleasant "surprise" ignited a 6% jump in share price over the couple of days that followed. That, on top of the 3% increase in value leading up to the release, pushed its stock up nearly 10% in a week.

Then the other shoe dropped. Short-term profit takers gobbled up their gains and ran for the hills, returning shares back to their prior levels. You can bet those traders will be back ahead of its next report, and the show will start all over again.

The underlying problem is that Palo Alto's sky-high spending keeps squashing its bottom line. Between the 40% jump in cost of revenue to $141.4 million and the 21% rise in operating expenses to $418.4 million, Palo Alto lost $0.70 a share last quarter -- 11% worse than the $0.63 a share loss it took a year earlier. Its jumps in revenue keep getting investors excited, until they remember its ongoing bottom-line losses. For those reasons, Palo Alto is a horrible stock for retirees.

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Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$127.74 (-1.91%) $-2.49
Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
PANW
$493.94 (0.43%) $2.14
Apple Inc. Stock Quote
Apple Inc.
AAPL
$136.72 (-1.80%) $-2.51
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$485.81 (-0.94%) $-4.60
NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
NXPI
$148.03 (-1.33%) $-1.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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