Here at The Motley Fool, we're all about long-term investing. That means we rarely give up on short-term losers, and we hate to take profits on long-term winners because those are the stocks that turn your portfolio into a market-beating machine.
That said, as difficult as it may be for long-term investors to admit defeat, there may be a time to admit that your initial investment thesis for a company is broken and your hard-earned cash should be put into a better investment. Here are three stocks our analysts would be walking away from.
Daniel Miller: Oh how the mighty have fallen. Sears Holding Corporation (SHLDQ), which was once a juggernaut store across America, joined forces with Kmart to become the dynamic duo of capital destruction -- not exactly a great investing thesis at this point. Sears has shed 29% of its value in 2015, 54% over the past five years and more than 80% since its all-time high, and if investors out there are still hanging on for hope, it's probably time to let go.
Recently, Sears generated more than $2.6 billion through sale-leaseback transactions with its real estate investment trust Seritage Growth Properties, but only about $1.5 billion of that filtered down to cash on its balance sheet. Moreover, during the second quarter Sears burned through $832 million cash, which was even worse than the $747 million it burned through during last year's second quarter. It won't take long before Sears' cash pile of roughly $1.8 billion is insufficient to fund the company's attempt at a turnaround; all the while, Sears' debt-to-equity ratio continues to climb higher as the company continues to struggle.
SHLD Cash and Equivalents (Quarterly) data by YCharts.
Speaking of a turnaround, or lack thereof, Sears' total domestic stores have posted comparable store declines of 10.9% and 10.8% in the first and second quarter this year, compared to the prior year. As we head into the all-important holiday shopping season, it's hard to imagine Sears will be able to compete with the growing strength of e-commerce.
Jason Hall: Seadrill, Ltd. (SDRL), it's finally time.
Though I'll keep one share as an object lesson, and a reminder that leverage and a huge dividend rarely work together in a heavily cyclical industry.
Seadrill management used debt to fund an incredibly aggressive newbuild program, while also paying out easily the biggest dividend in the industry. I wrote several articles before last year's crash pointing out the risks, but I viewed them as very low probability, though potentially devastating if they occurred.
Well, they all occurred.
Seadrill stopped its divvy, the stock has lost more than 80% of its value, and the company is likely just now entering into the bad times.
Demand for offshore drilling is muted, and there are way too many vessels competing for that business. Seadrill still has billions of dollars in newbuild obligations over the next year -- and all estimates are that offshore drilling could be even worse in 2016 as contracts expire.
Seadrill is entering dire straits with the rest of the industry. I'm not sure how long it can survive in 2016, once its long-term contracts start expiring, and the company fails to get replacement work for its vessels.
Time to take the few hundred bucks I have left in value and put them to work in a high-quality midstream operator.
Matt DiLallo: Chart Industries (GTLS 1.05%) is on the short list of stocks I'm almost ready to sell. The reason: I no longer have complete confidence in my original thesis. It's a thesis that was built on the belief that cheap natural gas in the U.S. would be shipped overseas, to China in particular, where gas was much more expensive. This would benefit Chart Industries because it makes the equipment needed to liquefy gas, known as LNG, and then regasify it.
There are two cracks in that thesis; the first has to do with how natural gas is priced overseas, which is that it is linked to the price of oil. When oil prices were higher, gas prices overseas were high relative to gas in the U.S. However, now that oil prices have plunged, gas overseas isn't quite as expensive. If oil stays lower for longer, which is the current consensus, it has the potential to tamp down demand for U.S. LNG and therefore Chart's business.
The second crack is the emergence of two other potential sources for natural gas that could reduce China's demand for LNG. These include pipeline gas from Russia and Turkmenistan as well as its own massive shale gas potential. Last year Russian gas giant Gazprom signed a 30-year $400 billion deal to provide 38 billion cubic meters of gas to China, or a quarter of its demand. Meanwhile, Turkmenistan is poised to supply 40% of China's gas demand by 2020, or 80 billion cubic meters, thanks to the expansion of the China-Central Asia Pipeline. Finally, China is making some progress tapping its shale gas reserves and plans to increase its output from the current rate of 1.3 billion cubic meters this year to 30 billion cubic meters by 2020. While that's half the goal it set in 2012, the fact of the matter is that China is making some progress with tapping its shale gas supplies.
All of this has the potential to mute Chart Industries' growth in the years ahead, which would weigh on its stock price. So, while I haven't yet made a decision to sell, I am no longer convinced that the bull thesis for Chart is a slam dunk.
