No one buys a stock thinking that it won't turn out well. Yet all investors have to face the fact that they'll end up buying losing stocks. One thing that separates the best from the rest is knowing when it's time to throw in the towel.
To help you pinpoint some potential dangers in the stock market, we turned to three Motley Fool analysts to talk about some stocks that they'd be inclined to sell rather than continuing to take a chance on their future prospects. Take a look and see if you agree with their views.
Selena Maranjian: Lumber Liquidators (NYSE: LL) may seem like the kind of stock you might want to buy, not sell. It has plunged about 75% over the past year (down to around $13.50 per share recently) and with a consensus recommendation of “hold” among Wall Street analysts, it can seem like it’s bargain-priced now.
So why sell? Well, because of uncertainty. The company has been slammed by several scandals and has seen much of its top management, including its CEO and CFO, resign or be replaced. It’s not without a path to recovery and the chance of a turnaround, if certain allegations are found to be without sufficient merit, but it’s not smart to invest amid so much chaos.
Let’s get specific. In February of this year, “60 Minutes” presented a story on Lumber Liquidators, alleging that the seller of hardwood flooring and other materials has been selling products from China with illegal levels of the carcinogen formaldehyde in it – and that it has been selling some flooring made from illegally harvested wood.
Lumber Liquidators is expected to pay some fines related to the illegally harvested wood, possibly in the tens of millions of dollars, and in response to the formaldehyde issue, it has announced that it will no longer sell laminated flooring materials from China. The formaldehyde accusations remain unresolved at this point. Should they be proven false or overblown, the stock could recover well – though it could also plunge more on more bad news. Meanwhile, it recently faced more than 100 class-action lawsuits, some of which are being consolidated , and the Consumer Products Safety Commission may recall its flooring. Why sign up for so much uncertainty, when there are plenty of less-worrisome and still appealing companies around?
Mike Pincus cofounded Zynga in 2007 and served as the company's CEO until July of 2013. While Farmville was an instant hit for the company, it's been a tough road ever since. It appears that Pincus may have been aware of the predicament, as he sold 16 million shares of company stock in a secondary offering just after the lock-up period ended in 2012.
During the past three years, revenue for the company fell an astounding 47%. That led the company's board to search for some type of shake-up, which led to -- you guessed it -- Mark Pincus returning as CEO. While the company's Dawn of Titans game might be a hit right now, barriers to entry in the gaming industry are very low. And employees don't seem too excited about Pincus' return either, giving him a measly 18% approval rating.
Dan Caplinger: Caesars Entertainment (NASDAQ: CZR) has dealt with a lot of challenges in recent years, with the slowdown in Las Vegas and excessive debt weighing on its performance. Yet even though troubling decisions -- like its move toward expanding in the hard-hit Atlantic City market and an expensive foray on the Las Vegas Strip -- have weighed on investor confidence, the final straw could come from recent legal action.
Earlier this year, Caesars Entertainment's operating-company subsidiary declared bankruptcy. Investors hoped that the Caesars Entertainment parent would be protected by the filing, but creditors have argued that Caesars improperly moved assets among various related entities in an effort to insulate some parts of the company from debts owed by other parts. In late July, a court ruled that, despite Caesars' arguments to the contrary, creditors could proceed with lawsuits against the parent company, even though the operating subsidiary's bankruptcy case is ongoing.
Given the current situation, the Caesars Entertainment parent might well end up having to file for bankruptcy itself, and that move could wipe out current shareholders. Moreover, even if the company survives, its prospects are still highly uncertain. Overall, the risk-reward proposition for Caesars Entertainment doesn't look attractive enough to justify holding onto the stock, even at depressed levels.
Brian Stoffel has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Selena Maranjian has no position in any stocks mentioned. The Motley Fool recommends Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. The Motley Fool is short Caesars Entertainment. Try any of our Foolish newsletter services free for 30 days. 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.
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