You might regret buying these stocks. Image source: Getty Images.
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The stock market hasn't done much over the past year. Adjusted for dividends, The S&P 500 is up a mere 1%. That paltry return is causing a lot of investors to look for ways to juice their returns. This desire to provide a boost often increases the temptation to look at stocks that have a few flaws, such as deep value stocks, turnaround candidates, or those with a binary outcome such as a biotech. That pursuit doesn't always end well -- in fact, we think it's the likely outcome for the following trio of tempting stocks.
: I'm always hunting for value stocks near a 52-week low, so I think the perfect example of a tempting company that's probably best off avoided is office supply giant Staples .
On the surface, Staples offers its prospective investors what looks to be a solid mix of value and income. Staples is currently trading at a mere 9 times next year's profits, 5.5 times its projected annual cash flow per share in 2016, and is paying out a 5.6% yield, which is well over double that of the S&P 500's average yield of 2.1%. If you're a value investor or income seeker, Staples looks like a good bet to deliver.
But Staples has a number of issues, and Amazon.com is No. 1! Bricks-and-mortar office supply stores like Staples and Office Depot have struggled to match the pricing power of an online giant like Amazon, which has been courting small and large businesses alike by undercutting bricks-and-mortar stores and providing the convenience of cheap delivery options. Staples and Office Depot's solution had been to merge, but the Federal Trade Commission put the kibosh on that idea, leaving Staples and Office Depot to fend for themselves against Amazon. The end result is Staples' only recourse is to further cut pricing on its products to court enterprise customers, thus hurting its margins, and closing stores in an effort to cut costs to support its falling margins.
Making matters worse, it isn't just Amazon that's eating into Staples' core business. We recently learned that Wal-Mart's Sam's Club is planning to launch an office supply delivery service pilot program. Considering that Sam's Club members tend to be small business owners, this could be a genius move for Wal-Mart, and another nail in the coffin for Staples' precipitously shrinking top line.
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For the time being, cost-cutting is keeping Staples' dividend afloat, but cost-cutting isn't a long-term solution to fixing Staples. While a tempting value, I'd suggest avoiding this office supplies behemoth.
Matt DiLallo: With the energy market starting to heal, there's a temptation to buy one of the sector's most beaten-down names: Chesapeake Energy . Don't do it. While the company has put bankruptcy worries on hold for at least the next year, it still has a mountain of debt to address before its financials are on solid ground.
As of the end of last quarter, Chesapeake Energy had a mountainous $10.4 billion in outstanding debt. A more pressing concern is the company's near-term debt maturities because it can no longer just refinance and roll this debt out into the future as it had in the past. Overall, the company has $2.2 billion in debt maturing over the next couple of years that it needs to address one way or the other. Asset sales continue to be one of the tools the company uses to reduce its debt; however, it also recently turned to debt-for-equity exchanges to pare down its outstanding debt.
These exchanges, however, have proven to be costly to investors. Chesapeake Energy recently diluted its existing shareholders by 10% in exchange for just 4% of its outstanding debt. More exchanges could be on the way, which will further dilute existing shareholders and likely weigh heavily on the stock price. Because the company still has such a long way to go, investors are better off avoiding Chesapeake Energy for now. There are plenty of other energy companies with just as much intriguing upside but without Chesapeake Energy's financial woes.
: There's an undeniably important need for new treatment options that can help patients diagnosed with Duchenne muscular dystrophy, a muscle-wasting disease with no cure and a poor prognosis. As a result, shares in Sarepta Therapeutics have surged recently on optimism that the FDA will green light eteplirsen, a novel drug that could help restore the production of dystrophin, a key muscle building-block, in 13% of DMD patients.
A decision on whether or not to green light eteplirsen was delayed by the FDA in May after a key FDA advisory committee recommended against approving eteplirsen based on questionable mid-stage study results. Yet significant lobbying by DMD advocates has investors hoping that delay signals a willingness by the FDA to ignore the committee's ruling. Conviction in that line of thinking grew last month when the FDA requested Sarepta provide it with additional data on dystrophin levels in eteplirsen patients. If that data proves eteplirsen increases the dystrophin production, then optimists believe the FDA could give eteplirsen an OK.
Although that's possible, it's a bit of a long shot, and that makes investing in Sarepta Therapeutics' shares a coin-flip. If the FDA approves eteplirsen, shares could soar, but if they don't, then shares could crash. Sarepta Therapeutics' pop-or-drop potential makes it an incredibly risky investment, and in my view, it's not suitable for most investors.
The article 3 Tempting Stocks to Avoid originally appeared on Fool.com.
Matt DiLallo owns shares of Amazon.com. andhas the following options: long January 2017 $55 calls on Wal-Mart Stores and short September 2016 $67.5 calls on Wal-Mart Stores. Sean Williams has no position in any stocks mentioned. Todd Campbell owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com. 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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