Not all stocks are created equal. While some are excellent candidates in a long-term buy-and-hold portfolio, others simply bear too much risk for you to bank your retirement on. Whether this risk takes the form of a highly uncertain future, large dependency on debt, or even a towering stock valuation, aspiring retirees need to look more closely under the hood of their stocks to determine whether or not those businesses can help them reach their financial goals. Or else those investors may find themselves thumbing for a ride on the road to retirement.
If you're investing for a stable retirement, here are six stocks from six Motley Fool contributors you may want to reconsider:
J.C. Penney Inc (NYSE:JCP)
Over the past year, beleaguered retailer J.C. Penney has actually made some progress. After more than five years of declines, the company posted revenue growth for the past two quarters, and increased same-store sales for the past three(1). In January, the company announced the first steps in a major restructuring that will save the company tens of millions of dollars per year(2), and there is some indication that this has helped stem the losses. Gross margins have improved, more profitable online sales have grown, and the company has significantly reduced its losses. Last quarter, the company was even free-cash-flow positive, a sign that management could turn the ship around.
However, sales are still down 38% from 2007, and even with the recent increases in same-store sales, it's way too early to call this a J.C. Penney turnaround. The company does have $1 billion in cash, but that's down almost 50% from the beginning of the year, while debt has ballooned to over $5 billion.
And that's just the financial picture. The broader headwinds that the company is facing are enormous, as consumers shift away from most traditional "big box" stores like Penney and Wal-Mart, and toward online retailers. Yes: JCP.com sales are growing, but only make up 10% of total sales today. -- Jason Hall
I greatly admire Twitter and use it a lot, too, but I'm not going to bet my retirement on it. Retirements are best built and sustained on stocks that let you sleep at night – ideally while they kick out dividends. Dividend-less Twitter is volatile, which can wreck havoc on withdrawals in retirement. Within the past year it's gone from $45 per share to above $70 to $42. Its revenue has soared more than 10-fold over just a few years, but its bottom line is still in the red and it's burning cash. Users are growing, but their engagement has dropped off. Its management has experienced significant turnover, too, making it hard to believe in. Its valuation, with a P/E near 80, doesn't suggest a bargain.
Perhaps most importantly, Twitter's future is uncertain. Remember MySpace, Napster, BlackBerry? There are other big networks out there that could displace Twitter, even if that's not the most likely turn of events, and new competitors can emerge, too. If you're not fairly sure of a company's future, putting money into it is speculating, not investing. -- Selena Maranjian
I break with many writers, all very bullish on Facebook's stock, for one simple reason -- I don't believe that it's reasonable to chase growth in a company that's already worth roughly half of Microsoft's (NASDAQ:MSFT) market cap, when its stock story bears so many similarities to the late-90s Microsoft that disappointed so many investors. Microsoft maxed out at a $600 billion market cap at the end of 1999 because its bottom line was growing rapidly, but also because its valuation exploded, rising from the single digits to a P/E of nearly 75 before everyone realized "hey, this is crazy" and decided to get out.
Facebook's P/E has been around or above 75 for practically all of its time on the public markets, but megacaps never hold onto this kind of premium valuation over the long run, no matter how strong their fundamental growth might be. Microsoft, for example, has more than tripled its EPS since its P/E peaked in 1999, but it's still worth less now than it was then because expectations have moderated. The phrase "this time is different" is often mocked by financial pundits, but investors seem all too willing to believe it in Facebook's case. The market will moderate its expectations for Facebook eventually, and while it's quite possible for Facebook to triple or even quintuple its earnings over the next decade (under rather optimistic assumptions), staying bullish today feels somewhat like staying bullish on Microsoft in 1999 -- both companies had already conquered the world, but everyone expects (or expected) them to conquer the galaxy, too. -- Alex Planes
Amazon.com remains an incredibly disruptive market innovator that's changing the way we shop, compute, and consume media. Despite its tremendous future prospects, it doesn't change the fact that Amazon.com is a lousy stock to rely on for your retirement. There are three key reasons why:
- Amazon.com is not consistently profitable. Over the past four quarters, it has lost around $215 million .
- Amazon.com's current valuation is based entirely on its future prospects, and it assumes the company will both continue to grow and match the profitability of world class competitors.
- Amazon.com pays no dividend, which means that any potential return is based entirely on the market's willingness to pay more for its shares.
Taken together, those factors paint a picture of Amazon.com as a company with incredible potential but not enough in current, delivered results to justify a spot as a core stock in your retirement portfolio. -- Chuck Saletta
Tesla Motors (NASDAQ:TSLA)
A perfect example of a great company that has no business in your retirement portfolio is Tesla Motors, especially at the current share price.
Don't get me wrong, Tesla is a game-changing company, and so far its execution has been fantastic. All I'm saying is that Tesla is still a very speculative investment, and more importantly, a lot of future success is already baked into the share price. Even the most optimistic analyst covering Tesla is projecting less than $5.00 per share in earnings for 2015, meaning that the stock currently trades for about 50 times next year's earnings.
In short, Tesla has too much uncertainty to be a great retirement investment. Will the upcoming Model X be successful? Will the company successfully be able to mass-produce a $30,000 electric car that has similar capabilities to the Model S? These things could happen, but we just don't know yet.
When you buy a stock like Tesla with an extremely high valuation, you're essentially betting on the company's ability to earn money in the future. With your retirement portfolio, not only do you want a profitable company, but one that has been profitable for some time with steady, consistent growth. Tesla may indeed get to that point someday, but for now it's still a stock for speculation. -- Matt Frankel
Annaly Capital Management (NYSE:NLY)
Many retirees have looked to Annaly Capital Management and other real-estate investment trusts that focus on mortgage-backed securities to get the income they need. With its high dividend yield of more than 10.5%, owning Annaly can appear to make up for the low rates that retirement investors are suffering on bank CDs and other fixed-income securities.
The problem, though, is that what Annaly investors earn in dividends, they could easily lose from a falling share price. Since the Fed first started threatening the end of its ultra-accommodative monetary policy in mid-2013, Annaly shares have lost almost 30% of their value, wiping out roughly three years' worth of dividend payments. Moreover, during that span, Annaly reduced its dividend in June, September, and December of last year, now paying a third less than it did in early 2013. As attractive as high dividend yields can be, most conservative investors who gravitate to income-producing investments can't afford the risk of such huge capital losses that could occur when interest rates start to rise once again. -- Dan Caplinger