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Like many folks, I’ve watched more than the usual number of movies lately. And I’ve determined that, like many of you, I have quite a soft spot for “underdog” sports films like “Rocky” or “Hoosiers” where athletes find themselves just in time to step up.
After the roaring rebound of many stocks last week, with the S&P 500 SPX, -1.01% adding 12% to log its best week in decades, it seems like Wall Street likes a good comeback story, too. However, this unprecedented market has been characterized by extreme volatility on both sides of the trade — and some stocks that have surged of late are giving investors false hopes.
Here are five where I would pocket the recent gains and then stay away.
Hanesbrands
Hanesbrands HBI, -2.29% gave back a bit on Monday, but still remains up more than 30% from its lows a week or so ago — and boasts a 6% yield to boot. But those taken in by the company’s temporary pay cuts and plans to make masks should think twice before trusting this rebound.
The reality is that it has been steadily slumping since 2015 thanks to out-of-step products. Case in point: Target did not renew its contract and in 2020 it will cease carrying Hanesbrand athletic wear sold under the Champion label. The company’s “innerwear” lines also remain challenged in the age of e-commerce competition and plenty of alternatives for shoppers looking for comfort at a competitive price.
Another troubling sign is that the company has binged on junk bonds in recent years and currently sits on $3.6 billion in debt — more than its current market cap. If consumers were already turning away from Hanes and then spending trends stay sour, it’s likely this stock will keep plumbing new lows.
Kohl’s
One battered consumer name that deserved its drubbing earlier this year is Kohl’s KSS, -5.62%. To be clear, Kohl’s haters predicting bankruptcy are way off base as the company had $700 million to start the year and just withdrew $1 billion more from its cash facility to weather recent coronavirus troubles.
But just because the company isn’t destined for failure in the near term doesn’t mean it’s worth betting on — and it certainly doesn’t mean the rally of more than 70% in the stock since the March lows is called for.
Keep in mind that in early March, Kohl’s predicted 1% same-store sales growth was the most optimistic outlook for its FY2020 performance. This was after a terrible holiday showing and news that its women’s line —which accounts for almost a third of sales — was struggling to connect. Wall Street analysts expect revenue to skid close to 11% in the fiscal year ending in 2021, according to the consensus compiled by FactSet — to under $17 billion, its lowest top-line figure since 2008.
Kohl’s stock sold off sharply as much as 8% on Monday before fighting back a bit to finish down “only” 6%. This should be a warning sign that the recent rebound could be short-lived.
Marriott Vacations
When the demands for social distancing hit the hospitality business, Marriott Vacations Worldwide VAC, -3.02% cratered alongside many other names in the space. But while the stock remains well off prior highs, bargain hunters have driven up the stock to more than double from its short-lived lows near $30 in March.
That may be nice for the swing traders who caught the falling knife, but most investors should simply steer clear. A recent growth binge that has brought debt up from under $740 million in 2016 to more than $4.2 billion at the end of last year, and routine maintenance that must continue even at vacant properties means plenty of bills to pay and no revenue coming in.
Furloughs, salary cuts and resort closures announced recently will help stop the bleeding, and the company just raised the cap on its credit facility. But keep in mind that one Federal Reserve official just warned shutdowns could linger for 18 months — and in his opinion, a V-shaped recovery is unlikely.
Marriott Vacations could come through this if management manages its cash situation, social distancing wanes quickly and affluent consumers with cabin fever spend eagerly. But it would be naïve to think all those things are easy, or that they are foregone conclusions. More likely is that the stock will continue to see the pressure that sent it tumbling lower in March. Investors should tread lightly.
Wayfair
Of course, brick-and-mortar retailers are easy to pick on. But one e-commerce stock that also appears to be enjoying a “dead cat bounce” is Wayfair W, +6.06% . The stock touched an intraday low of under $22 in mid-March but has roared back to more than $81 a share as of Monday’s close — a surge that included a 38% gain in a single session last week, and seems far too good to be true.
After all, Wayfair caters to the most discretionary of all spending via furniture and home goods. And while bored, home-bound Americans may be inclined to surf more, they also are facing real economic anxiety that could delay any new bedroom-set purchases. Sure, the company recently said it expects to meet or exceed previous first-quarter guidance. But January and February are hardly proxies for the “new normal,” as unemployment claims only began to spike more recently.
Furthermore, it’s worth reminding folks of the unprofitable reality of Wayfair. A 20% revenue growth rate is nice, but frankly isn’t enough to cut the mustard. Anyone remember when the narrative got ahead of the stock in 2019, when the stock fell from $160 a share in April to $80 a share in October?
Banking on Wayfair was risky even in the coronavirus-free economy of 2019. That makes it particulary difficult to trust this stock here after such a steep run back from March’s lows.
Wingstop
Look, I like chicken wings as much as the next guy. But Wingstop WING, +0.04% was already looking like a fashionably frothy restaurant name in early 2020, and after its recent whiplash-inducing swings, it’s time to back away from this stock until things settle down.
Consider the stock went from about $82 on March 5 to a low of $44 March 19 and then back present levels around $99. You better be damn certain you’re on the right side of those trades, or you’ll lose your shirt! And the reality is that even if the coronavirus is pushing some folks to order more takeout, high-growth restaurants like Wingstop depend on new locations, not existing stores — and social distancing forces delays in hiring, construction and other plans.
With a forward P/E of about 100 and only a roughly 11% top-line growth rate, there’s not going to be any margin for error if this stock’s expansion stalls in the second quarter. I tip my hat to the bold traders who managed to snap up this stock under $50, but I strongly recommend they use the recent rebound as an opportunity to run for the hills.
