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3 Stocks I Would Avoid at All Costs

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Investors should be careful with these three companies, given the specific challenges they face.

The stock market has continued its unstoppable rise in 2015, with many stocks seeing huge gains in the recent past. Yet some companies haven't been nearly as lucky, facing huge challenges that pose real long-term threats to their business models -- and in some cases, their very existence.

We asked three Motley Fool contributors for their thoughts about which stock they would avoid at all costs. Let's take a closer look at the companies they came up with, and why they think you should be wary of what's in store for them in the future.

Source: Wikimedia Commons.

Selena Maranjian (Lumber Liquidators): Lumber Liquidators (LL -5.63%) has done well for its long-term shareholders, averaging annual gains of 25% during the past seven years. During the past year though, it's down more than 60%, with most of that happening since late February, when its stock closed in the high $60 range. It's recently been in the mid-$30 range.

Clearly, something has happened. That something is an expose on 60 Minutes, which alleged that the seller of hardwood flooring and other materials has been selling products from China with illegal levels of the carcinogen formaldehyde in them. Yikes.

Note that I said "alleged." Nothing has been proven in a court of law, and perhaps the company will end up vindicated. But right now, its future has grown very murky.

With many healthy, growing companies out there that sport appealing valuations and no high-profile investigations into possible criminal behavior, I'm not inclined to invest in Lumber Liquidators anytime soon. After all, if it's found to have behaved badly, it will face costly lawsuits. Simply replacing a lot of tainted product will be costly.

In its defense, the company says that 60 Minutes used a faulty testing method, and noted that its Chinese suppliers agree to abide by its standards -- though it has also conceded that it can't control its suppliers.

Despite the bad publicity, some still remain interested in the company. Analysts at Janney Capital, for example, have suggested that management would have been crazy to risk their reputation this way. If Lumber Liquidators emerges victorious, these days will have presented a great buying opportunity for patient investors. But it's a too-risky pick for me.

Rich Duprey (Abercrombie & Fitch): Abercrombie & Fitch (ANF -5.92%) is caught between a rock and a hard place. Kids don't care to wear clothes emblazoned with company logos anymore, and the teen retailer needs to reposition its brand to reflect the changing preferences.

Source: Abercrombie & Fitch Investor Relations

But Abercrombie & Fitch has a lot more problems than whether kids want to sport the company's name on their chests. The retailer has a whole new management team that needs to hit the ground running after former CEO Michael Jeffries bolted right in the middle of the Christmas selling season.Unfortunately, Abercrombie's efforts to downsize its logo business hasn't been pretty. Reducing its logo business contributed 12 percentage points to the 10% plunge in same-store sales that the company experienced in the fourth quarter, while overall sales tumbled 14% from the year-ago period.

The team needs to quickly get a handle on the once-hot Hollister brand that has run icy cold, particularly in Europe. Comp sales for Hollister dropped 11% in the quarter. It wasn't much better anywhere else either: The namesake A&F brand's comp sales fell 9% in the fourth quarter, while Abercrombie Kids was off 6%.

Abercrombie also needs to rein in its unwieldy store footprint. During 2014, it closed 51 stores, bringing the total to 275 that have been shut since 2010, and it fully intends to maintain that pace, with 60 more stores on the chopping block for the coming year. Because 70% of the company's leases expire during the next three years, the company should have plenty of opportunity to reduce further the 799 stores it operates in the U.S., and another 170 around the world.

There was a time when there was no such thing as an Abercrombie discount, but those days are long behind it. Its outlet stores were one of the very few bright spots in its earnings report, as same-store sales jumped 20%. The company plans to grow that business further, opening 11 new outlets in the U.S. this year.

In short, Abercrombie & Fitch is in the midst of a major overhaul of its operations and positioning. Though its stock lost half its value during the past year, there's no reason to buy until it proves the latest changes are actually working.

Dan Caplinger (Aeropostale): Like Rich, I think the teen retail space is going through some major turmoil right now, and one of the hardest-hit victims of that trend has been Aeropostale (AROPQ). Throughout last year, the teen retailer has suffered from the need to offer huge promotional discounts on its merchandise in order to clear out inventory. Huge declines in revenue and same-store sales strongly suggest that once-loyal customers have fled for the exits along with nervous shareholders.

Somehow, though, Aeropostale has managed to lift its stock price considerably so far in 2015. Most of those following the stock expected sales declines and net losses throughout the current fiscal year; but bullish investors have sent Aeropostale shares up 75% since the beginning of January. That comes largely from two boosts to fourth-quarter guidance, with the retailer now expecting roughly breakeven operating results that would translate to only minimal per-share net losses.

With the bar so low, it's conceivable that Aeropostale could see further share-price gains simply by continuing to survive. For long-term investors who'd prefer a true growth story, though, the uncertainties facing Aeropostale are too large to justify the stock as anything other than a high-risk speculative play. 

Neither Rich Duprey, Selena Maranjian, nor Dan Caplinger have any position in any stocks mentioned. The Motley Fool recommends Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

LL Flooring Holdings, Inc. Stock Quote
LL Flooring Holdings, Inc.
$6.54 (-5.63%) $0.39
Aeropostale Stock Quote
Abercrombie & Fitch Stock Quote
Abercrombie & Fitch
$22.87 (-5.92%) $-1.44

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

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