Choosing the right stocks is crucial to your investment success, of course. However, it is also important to avoid certain companies that will prove detrimental to your investment performance.
It is a strong statement to make that there are certain stocks you should put on your never-buy list. However, the two companies below belong in that category due to long-standing issues that are tough to overcome.
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1. Macy's
Macy's (M 1.00%), which operates department stores, including under its namesake and Bloomingdale's brands, has been confronting ongoing issues for the last several years. This includes online competition, notably from behemoth Amazon, which has been offering merchandise, including apparel, with fast delivery and low prices.
In two out of the last three years, Macy's had negative same-store (comps) sales. This includes a 0.8% decline in 2019. Its operating income dropped from 2017's $1.9 billion to $970 million last year.
In an effort to stabilize and then sustain profitability growth, management implemented its Polaris strategy earlier this year. This includes expanding its loyalty program, strengthening its higher-margin private brands, closing underperforming stores, investing in its websites and mobile apps, and cutting costs.
Some of these steps, like shuttering stores and slashing expenses, are easier to accomplish than the others. Granted, it is hard to measure progress in the COVID-19 environment, but its fiscal second-quarter comps (ended Aug. 1) were down more than 35%, and under generally accepted accounting principles (GAAP) flipped to a $631 million operating loss compared to $155 million of operating income in the year-ago period.
While digital sales increased by 53% year over year, the momentum slowed throughout the quarter as Macy's reopened stores. Facing a tough retail environment, strong online competition, and an out-of-favor department store business, this is one stock you should put on the sidelines.
2. AMC Entertainment
AMC Entertainment Holdings (AMC +2.36%) is another stock that you shouldn't invest your hard-earned money in, despite its popularity on Robinhood. The company has taken steps this year to avoid bankruptcy. As recently as last month, AMC warned in a Securities and Exchange Commission (SEC) filing that it needed a large liquidity infusion. It followed this up with a filing to sell 20 million common shares, which would raise about $75 million based on the current stock price, which surged on Nov. 9 after positive vaccine news from Pfizer and BioNTech.
If AMC can pull this off, it can delay its day of reckoning. But the company is still confronting severe issues that have hurt attendance. These aren't going away anytime soon.
Even before the pandemic, AMC was having trouble getting people into its theaters. In 2019, AMC's admission revenue fell by 2.5% to $3.3 billion, partly due to lower attendance. While higher food and beverages revenue helped offset this weakness, this was due to the company raising prices.
This year, the virus has caused governments to restrict activity, and AMC shut down its theaters. In the third quarter, its domestic theaters started reopening with limited seating capacity. Nonetheless, the company's revenue dropped by 91% versus a year ago to $119.5 million. This widened AMC's loss to $905.8 million, compared to a $54.8 million loss.
With COVID-19 cases reemerging, it remains unclear if authorities will clamp down again or when AMC can open theaters at full capacity. Clearly, this puts the company's future in jeopardy.
If it can get past these difficult times, AMC faces a further challenge in the long run: the shorter release times before movies appear on premium video on demand and streaming services. This summer, it did reach an agreement with Comcast's Universal Pictures whereby AMC will have a shorter exclusivity period in its theaters, and it will share some of the streaming revenue.
However, others are not necessarily following the same path. For instance, Walt Disney has released films directly to its streaming service, including Mulan (with an extra $30 fee for the first three months) and Hamilton, and its Pixar studio will place its movie Soul on the service at the end of December.
With AMC's very existence threatened, there's just too much risk it won't survive. While Macy's challenge is less dire, it is also confronting serious challenges. Hence, I would avoid the shares of both companies since they present a gamble that long-standing trends will reverse. That leap of faith is just too big.
