There are two big questions on every investor’s mind as we enter the new year. First, what are the stocks to buy in 2020? Second, what are the stocks to sell in 2020?
I’ve already attempted to answer the first question for you in my gallery on the top stocks to buy for 2020. To succinctly recap, I think growth stocks will have a good year, supported by healthy economic conditions and low rates, while some big 2019 losers — like IPO stocks and pot stocks — could stage huge comebacks in 2020.
Additionally, video game stocks look good in 2020, thanks to new console launches and cloud gaming catalysts. So do Chinese internet stocks, digital ad stocks and enterprise software stocks — all of which should be supported by a global rebound in corporate spending trends amid easing trade tensions.
However, that’s enough talk about stocks to buy for 2020. Now, let’s pivot our attention to stocks to sell for 2020.
Without further ado, then, let’s take a look at my list of five stocks to sell in 2020.
Shares of Chinese video streaming giant iQiyi (NASDAQ:IQ) have gone parabolic over the past three months, rising more than 45% over the stretch as the company’s underlying fundamentals have rapidly improved.
That is, the U.S.-China trade war has essentially been put on pause until earlier Wednesday. Global consumer and corporate confidence levels are rebounding, especially in China. The U.S. dollar is weakening. China’s digital ad market is in a position to rebound, as are consumer-spending trends throughout China.
In other words, everything is getting better for iQiyi.
But, on the heels of a 45%-plus surge in 3 months, all that good stuff is now fully priced into IQ stock. At a 52-week high valuation of over 4-times trailing sales, IQ stock is one operational misstep away from falling off a cliff. And, in the volatile China streaming market in which iQiyi operates, the chance of an operational misstep over the next few months is fairly high.
Consequently, while iQiyi’s fundamentals are improving, IQ stock isn’t worth chasing here. It’s come too far, too fast — and a pullback feels imminent.
Shares of struggling specialty pharmacy retailer Rite Aid (NYSE:RAD) nearly tripled in late 2019 thanks to a strong third quarter print, which implied that the company’s apocalypse may not be just around the corner. But, the fundamentals still aren’t good here, and the recent rally in RAD stock feels way overdone — and due to turn into a selloff in 2020.
Long story short, pretty much everyone and their best friend was short RAD stock into the third-quarter print, on the consensus belief that Rite Aid was just a few quarters away from bankruptcy. However, Q3 numbers came in much better than expected, and significantly eroded the bankruptcy-focused bear thesis. Shorts rushed to cover, and this short-squeeze sparked an enormous rally in RAD stock.
This rally, though, is overdone. One quarter is one quarter, not a trend. The trend here is still adverse. Mega-retailers are more aggressively than ever encroaching on Rite Aid’s territory. Inevitably, they will eventually squeeze Rite Aid out of the game because consumers prefer the convenience of all-in-one shopping.
Not to mention, bigger peers can undercut Rite Aid prices because they have bigger balance sheets and income statements that can absorb the margin hit.
The Rite Aid apocalypse may not happen in 2020. But, it will happen at some point. As such, recent strength in RAD stock is a dead-cat bounce. This bounce will fade, and RAD stock will resume its secular decline in 2020.
I’m broadly bullish on pot stocks in 2020. I think the cannabis sector will stage a huge rebound over the next 12 months, assisted by improving demand trends in Canada, reduced supply issues, fuller production capacity, increased retail distribution and more aggressive moves into the U.S. market.
However, I don’t think all pot stocks will bounce back from an awful 2019. Instead, in 2020, we will start to see a clear separation between cannabis winners and losers. The rebounding cannabis market will consolidate around the winners, and forget about the losers.
Overall, Hexo (NYSE:HEXO) projects as one of the losers. This company doesn’t appear to have what it takes to compete with the likes of Canopy Growth (NYSE:CGC), Aurora (NYSE:ACB) or Cronos (NASDAQ:CRON) at scale. They are way smaller, with way less production capacity, experience, resources and U.S. market exposure.
As such, while Canopy and Aurora’s growth trends will improve in 2020, Hexo’s will not. This divergence will weigh on HEXO stock, and likely cause 2019 weakness to spill over into 2020.
For those who are unaware, Eros (NYSE:EROS) is a very old Indian film company that is trying hard to pivot into streaming with its Eros Now platform, and hopes to one day turn that platform into the Netflix (NASDAQ:NFLX) of India.
Sounds enticing, right? But, there’s one big problem here — everyone else is also trying to be the Netflix of India, including Netflix itself.
In a nutshell, everyone recognizes three things. One, India is a huge country. Two, most of the people in that huge country still aren’t connected to the internet, let alone paying for streaming services or doing online shopping. Three, internet service expansion in India over the next decade will create huge growth opportunities for internet companies of all shapes and sizes from all across the globe.
Collectively, because everyone recognizes those three things, everyone wants a piece of the India internet growth narrative. Importantly, there’s no firewall like the one in China to stop anyone. So, Netflix is in India. So is Amazon (NASDAQ:AMZN) and Disney (NYSE:DIS), through its Hotstar service.
Can Eros really compete with Netflix, Amazon and Disney? No. And, because the household economics in India imply that this will likely pan out as a “one-streaming-service-per-household” market, there won’t be much room for Eros to even stay alive in India’s streaming market at scale.
As such, recent strength in EROS stock — shares are over 120% over the past six months — won’t last. In 2020, the likes of Netflix, Amazon and Disney will all up their India content investments. As they do, they will win over subscribers, at the expense of Eros.
Witht that, Eros’ growth trends will fall flat, and EROS stock will drop.
The final name on this list of stocks to sell is Naked Brands (NASDAQ:NAKD), the intimates apparel company that will most likely end up at zero when all is said and done.
There’s a laundry list of things not to like about Naked Brands. The company plays in the hyper-competitive intimates apparel market that is dominated by L Brands (NYSE:LB), Hanesbrands (NYSE:HBI), American Eagle Outfitters (NYSE:AEO) and the like. In that space, Naked Brands owns a bunch of brands that nobody wants to wear, and for which demand is collapsing. Revenues are in free fall, and gross margins aren’t holding up too well, either.
Expenses, meanwhile, aren’t dropping rapidly, because in order to sustain any sales at all, the company has to pour money into marketing. The company is far from striking a profit. There’s no visible pathway to profitability, given demand headwinds and expense issues. Also, there is a mount of debt on the balance sheet — which puts a shot clock on the profitability pathway.
Overall, Naked Brands appears doomed. Sure, NAKD stock has already been beaten and bruised, a hundred times over. But, zero is a real possibility here given the leverage and lack of profits — so I think this is still a name to sell in 2020.
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