Losing the Losers

The stock market has been spiraling downward, our new Fed Chairman Ben Bernanke seems intent on raising interest rates even higher, and the American consumer has been squeezed with higher costs at the gas pump and on monthly mortgage payments. In unsettled times like these, some investors want to scale back on the amount of risk they are taking in the stock market. Conversely, others want to use the pullback to look for cheap stocks to buy. Either way, they need a way to figure out which stocks to avoid.

I have a blog on AOL called “Hilary on Stocks” and every day I post a company analysis along with a target price for the company’s stock. To help my readers in both camps, I’ve written a series of posts over the past two weeks that fit with the theme, “Stocks to Sell Now.”

Of course, there are many reasons to sell a stock -- rising commodity costs, increased competition, turnaround challenges, and just a plain old frothiness to the stock price. All the stocks I’ve highlighted in this series have different reasons to be avoided. You can use these broad categories as guidelines to help you prune your own portfolio.

Watch out for companies that are:

On the losing side of high energy. I found some stellar companies that are, unluckily for them, likely to be hurt by rising fuel costs. As the cost of energy keeps escalating, this is likely to eventually crush the profitability of companies that are dependent on oil prices to transport or to make their products. Stocks headed toward a fall because of rising fuel costs include Carnival Cruise Lines (CCL): “Rough Seas Ahead,” from May 22; JetBlue (JBLU): “Unfriendly Skies Ahead” from June 5; and Thor Industries (THO): “The Road Trip Is Over” from May 4.

In the midst of a tough turnaround. I highlighted some companies which seem to be improving thanks to upgraded management, new product lines and a “plan” that sounds great. But watch out! A turnaround is tough to engineer. Sometimes Wall Street reacts prematurely to what turns out to be a temporary lift. Turnaround stocks that disappoint can head south real quickly, selling off even faster than the first time around. Stocks like this that I covered in my blog include, Krispy Kreme Doughnuts (KKD): This Doughnut Is Full of Holes” from May 26; Hewlett-Packard (HPQ): “Still Bearish” from May 23; and General Motors (GM): “Tread Carefully” from June 6.

Susceptible to a weakening real estate market. Given current conditions of growing housing inventories and dropping prices, I consider most real estate stocks dangerous investments. I fear they will suffer as the big housing bubble continues to deflate. In this category I include the home builders and the home improvement companies. Here are the two I singled out as particularly vulnerable in my blog: KB Homes (KBH): “Home Not So Sweet Home” on May 24 and Home Depot (HD): “The Building Boom Is Over” on May 30.

Falling behind the competition. In the world of investing we always look at comparables, which is just a fancy way to say competitors. If a company consistently lags behind others in its industry, then it is time to sell. Sadly, here are three famous brand names that just can’t keep up these days: Gap (GPS): “Stay Away From the Fashion Victim” from May 25; La-Z-Boy (LZB): “The Decliner” from June 9; and Playboy (PLA): “Performance Anxiety” on June 8.

Doing fantastic, but just too pricey. Lastly, there is a category of stocks to sell which are great companies that just have become too expensive to own anymore. Here’s why to be concerned about high-priced names right now: When the stock market takes a dive and fund mangers need to lock in gains (they don’t want to ruin their hard earned returns), so they often sell the stocks that have made them the most money. They might still love these companies but simply believe the company has reached a peak and so their next step is a huge sell order. You don’t want to get caught up in the downdraft. As examples here, I include Apple (AAPL): “Harvest Time Over?” on June 7 and Coach (COH): “Not My Bag” on June 1.

For every trade you need a buyer and a seller. So don’t fret if you are holding these stocks for the long term and don’t want to let go. Eventually, the tide always turns and what was once a loser becomes a winner. Even if you change your mind and decide to get out, all you need is one buyer willing to be the other side of your trade. That is the beauty of the stock market. Good luck to you.

Visit her at hilarykramer.com.