It's easy to get excited about various stocks when we read some breathless piece about them or see some financial prognosticator on TV utter some kind words. We need to remember to take a closer look at any portfolio candidate, though, and to give serious consideration to any company's risks. Here are three companies whose stocks seem to have a solid chance of dropping in the year ahead.
It pains me to include Seadrill (SDRL) in this list, because I'm a shareholder who has seen her shares lose more than 90% of their value. It's easy to think that once a stock has lost that much that it can't fall much more, but trust me -- it can. Seadrill's ultimate future isn't necessarily bleak -- it has some significant advantages, such as a relatively young and modern fleet of rigs -- but it's not doing well right now and it's not clear when things will change.
The stock once paid a fat dividend, but the last payment was in 2014. The offshore drilling business is not as attractive as it used to be, given the low price of oil and the high cost of the drilling. Rising prices for oil will help, but they're not generally expected any time soon, and in the meantime, Seadrill is carrying a lot of debt. It's long-term debt load was recently close to $10 billion worth. The company is also on the hook for billions of dollars in payments toward the construction of more than a dozen new rigs, while its fleet is not fully contracted – in part due to a general oversupply of rigs. Lots of cash is going out, and not enough is coming in. Seadrill does have many long-term contracts, which assure it of around $5 billion in revenue in 2016, but as current contracts expire, when or whether they'll be renewed is unknown. Already, many of its rigs are idle and not generating income for it -- and their number may rise.
Another stock that could burn investors in 2016 is GW Pharmaceuticals PLC (GWPH), a biotech company developing treatments from cannabinoids in marijuana plants. As with any biotech company, its future success depends on it earning FDA approval for one or more drugs and then those drugs selling well. Just like Seadrill, GW Pharmaceuticals might be a long-term winner -- but right now, it's not the most attractive portfolio candidate, and its shares might retreat before they advance.
A glance at its financial statements is telling: Revenue has been roughly flat for years, and it has been unprofitable, too, with negative free cash flow. Its shares don't appear to be bargains, as they recently traded at a price-to-sales ratio of 28.1,a bit higher than the S&P 500's average of 1.8.
What's the problem here? Well, lots of things. For starters, medical marijuana-based treatments are not yet widely accepted -- and indeed, marijuana remains an illegal substance in much of the U.S. That could change for the better -- or for the worse, depending on the inclinations of Congress and presidential administrations. While some studies point to great medical benefits for marijuana or cannabinoids, other studies suggest that marijuana is harmful. The bottom line for GW Pharmaceuticals is that it's too early to have much visibility into its future. If you're interested in it, perhaps at least wait for it to have an FDA-approved drug or two on the market.
Finally, there's SodaStream (SODA), maker of do-it-yourself soda-producing machines and related supplies. It can certainly seem to be an attractive business. Its business model involves selling consumers relatively inexpensive machines and then making more money through recurring revenue from higher-margin syrups and carbonators. It also has a socially responsible angle, helping consumers avoid generating lots of soda-container waste.
But an appealing business model isn't enough. The stock lost 59% in 2014 and 19% last year. While SodaStream's machines were popular earlier, revenue has been shrinking more recently. Part of the problem is a consumer shift away from soda and toward water and other drinks. SodaStream is repositioning itself as a supplier of "water made exciting," but it remains to be seen if that will be enough to turn its fortune around. One competitive threat has not turned out to be a significant one so far: Keurig Kold, the instant-cold-drink machine from the folks who made the hugely successful Keurig machines for instant coffees. My colleague Rick Munarriz has also suggested that even if Kold is a big success, that could help SodaStream, generating more interest in home-made sodas and more sales for SodaStream's less expensive machines.
Another plus is that SodaStream carbonators are still selling well, suggesting that many of those who bought its soda-making machines are still actively using them. SodaStream is also introducing new machines, such as its Ultimate, which will be able to dispense both hot and cold drinks, including sodas and coffees. So don't write off SodaStream -- but don't be surprised if its stock continues to slide, at least in the near term, if not beyond.
There are plenty of companies with futures you can be more certain about than the ones above, so consider looking elsewhere for solid investment ideas.