Investing in 2020 has not been for the faint of heart. The unprecedented uncertainty created by the coronavirus disease 2019 (COVID-19) pandemic tanked the broad-based S&P 500 during the first quarter. Whereas bear market declines of at least 30% have historically occurred over 11 months, the S&P 500 shed 34% of its value in roughly one month.
When the going gets tough, investors often turn to brand-name stocks of companies with which they're familiar. Unfortunately, this isn't always a great strategy, primarily because not all well-known stocks are good investments.
If you're looking to put your money to work in well-known businesses, I suggest keeping these four brand-name stocks off your list.
American Airlines Group
I'd steer people away from investing in the airline industry. This industry requires huge capital inputs to produce mediocre margins. If there's as much as a hint of distress in the economy, the airline industry struggles mightily.
Among airline stocks, I view American Airlines Group (NASDAQ:AAL) to be the absolute worst of the worst. American Airlines ended the most recent quarter with around $8.3 billion in cash and cash equivalents, and it qualified for COVID-19 relief loans from the federal government. However, it's lugging around a back-breaking $41.2 billion in total debt. American made the unwise and expensive choice to upgrade its commercial plane fleet long before its useful period was up. As a result, it's now in serious financial trouble.
Worse, there's no shortage of uncertainty surrounding air travel. Although airlines are benefiting from lower fuel costs, passenger counts are way down. Even were passengers willing to travel, commitments to leave middle seats empty for social distancing purposes threaten to continue the cash outflow for airline companies. I'm frankly not sure American Airlines will survive over the long run.
Mention Eastman Kodak (NYSE:KODK) to your parents or grandparents and their eyebrows probably perk up with interest. But make no mistake: The Eastman Kodak you see today is a hollow shell of this company's former glory as a digital photography giant.
Eastman Kodak recently caught fire following the announcement that it was to receive a $765 million loan from the federal government to make ingredients used in generic drug production. However, this loan has been shrouded in controversy. Management knew about the loan roughly one week before the announcement, and company executives were awarded stock options one day prior. The Securities and Exchange Commission is investigating the matter as possible insider trading.
The real issue with Kodak -- beyond that it has no business operating in the pharmaceutical industry -- is that its remaining operating segments and legacy divisions are shrinking. Kodak has (drumroll) reported 14 consecutive years of declining revenue, and the COVID-19 pandemic all but assures that No. 15 is on its way. The company is a mess that investors would be wise to avoid.
Another familiar brand-name stock is ride-hailing company Uber Technologies (NYSE:UBER). Uber's ridesharing service and food delivery app Uber Eats are exceptionally popular among the younger crowd, but popularity doesn't always equate to profitability.
Like American Airlines, Uber has (for now) huge capital inputs that could eventually yield mediocre margins at best. Uber once controlled a dominant percentage of the ridesharing market in the U.S., but that's slowly been dwindling. According to Second Measure, Uber's U.S. market share has declined from 82% of ridesharing in January 2017 to a 69% share in September 2020, with Lyft scooping up the remainder.
Uber is also hell-bent on becoming the premier food delivery name in the U.S. In July, it agreed to acquire Postmates for $2.65 billion in an all-share deal. The issue with buying Postmates is that food delivery has been an even bigger cash black hole than ride-hailing. Through the first half of 2020, with the pandemic as a tailwind for food delivery services, Uber Eats generated an earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $535 million.
Uber is chasing low-margin, money-sucking businesses, and it doesn't belong in investors' portfolios.
The final brand-name stock that investors should avoid like the plague is Canopy Growth (NASDAQ:CGC), the largest pure-play marijuana stock. Though there's little question that cannabis could be one of North America's top-growing industries this decade, Canadian licensed producer Canopy Growth is not how you'll want to play it.
Despite the company's cash-rich coffers, which derive from numerous equity investments from Constellation Brands, Canopy has been burning through its capital at a frightening rate. Relatively new CEO David Klein has tightened the belt in the current calendar year, with Canopy closing 3 million square feet of licensed indoor greenhouses and slashing share-based compensation. Still, Canopy's net losses have been huge, and the company appears unlikely to be profitable on a recurring basis until fiscal 2024 (year-end March 31, 2024).
Canada's numerous regulatory miscues are also going to hurt Canopy Growth's potential. Key provinces (ahem, Ontario) have struggled to create an adequate retail presence for Canada's licensed producers. When coupled with Canopy overpaying for acquisitions and expanding capacity well beyond domestic needs, Canopy needs to clean up before it can become investment-worthy.