There's been a lot of volatility for investors in 2014, and next year could lend itself to even wilder gyrations. With fluctuating commodity prices, interest rates unlikely to remain dormant for long, and the economy on the move, there's going to be plenty of winners and no shortage of losers.
McDonald's , Sears Holdings , and Cisco Systems face uphill battles in 2015. McDonald's is struggling with unfavorable store trends. Sears is seeing both of its flagship retail chains fade in popularity. Cisco is facing cutthroat competition. Our Motley Fool contributors feel that these three stocks -- market darlings in their prime -- could burn investors in the year ahead.
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Tamara Walsh (McDonald's): A series of missteps including food safety concerns in China, a massive marketing snafu, and product pipeline issues have left McDonald's fighting for its fast food dominance. Shares of McDonald's are now trading near the stock's 52-week low at around $90 a pop. However, if you are considering buying the stock here you may want to hold off for now. The fast food chain is rolling out a variety of new initiatives in hopes of reinvigorating the business. Yet, a turnaround won't happen overnight, and 2015 will likely be a transitional year for the Golden Arches.
There is also no guarantee that these initiatives will actually boost sales for the company. McDonald's, for example, will install digital kiosks in 2,000 of its U.S. restaurants in the year ahead, which will enable customers to customize their meals on a touchscreen device. McDonald's hopes this will help them better cater to consumers' evolving tastes. However, it could actually increase wait times and lead to a poor customer experience.
From new digital ordering systems and payment services to fresh menu items, McDonald's is throwing a lot at the wall today in hopes that something sticks. As one of the most recognizable brands in the world, McDonald's should remain a dominant player in the quick service restaurant industry for many years to come. However, given the near-term challenges facing the company, I wouldn't be a buyer heading into the New Year.
Rich Duprey (Sears Holdings): There just no saving this once iconic image of U.S. retail. Sears is suffering the effects from years of not-so-benign neglect under the hands of chairman and CEO Eddie Lampert. And 2015 could be the year it finally goes under, burning at last all those investors who hoped this self-styled Warren Buffett hopeful would impart his vaunted magic on the department store chain.
Instead, they've been treated to a display of hedge fund financial wizardry that's resulted in a stunning 80% loss in its stock's value. Sears Holdings faces a cascading litany of problems as it heads into the New Year:
- It will now close as many as 235 underperforming stores this year, up from the previously declared 130 stores
- The failure to sell its remaining stake in Sears Canada indicates the waning value the market is assigning to Sears remaining brands
- Lampert's been forced to resume extending short-term financing to Sears to keep vendors and suppliers from bolting and allowing the retailer to make it through the Christmas season
- The possibility Lampert will create a REIT to house Sears' real estate will damage an investment in Sears Holdings as much of whatever value is left in the business -- and its ability to borrow money -- is housed in its properties
Investors would do well to be wary of Sears in 2015. Revenues are falling at an alarming rate as Sears reduces the number of stores open, and same-store sales are also in a tailspin that even its rather innovative Shop Your Way member loyalty program can't reverse.
Optimist, bullish investors may still believe there's a way to salvage this investment, but 2015 could be the year Sears Holdings liquidates that last vestige hope.
Brian Nichols (Cisco): Cisco's stock has traded higher by 31% over the last year and is now trading near five-year highs. This performance might make Cisco look like a no brainer investment opportunity, but reality paints a grimmer picture.
Cisco creates nearly half of its annual revenue from IP switching and IP routing, two segments that go hand-in-hand. During fiscal 2014, IP switching sales and IP routing sales declined 5% and 7%, respectively, for a combined $21.6 billion. Clearly, mid-single digit losses are never good, much less when it occurs to 50% of an enormous business.
That said, much of Cisco's business relies on supplying equipment to telecom companies (IP routing, IP switching) and to data centers (IP switching, UCS servers). The latter is often looked at as a catalyst for returned revenue growth in IP switching.
Specifically, Cisco's UCS server sales found in data centers -- grew 30% during its last quarter, and are currently on a $3 billion revenue run rate for the next 12-months. Yet despite this growth, IDC estimates that Cisco's server share was unchanged at 5.9%, of the $12.6 billion market, during the second quarter. That's a very limited presence in the server market.
Further, capital expenditures in the telecom space continue to dwindle, with research firm Delloro expecting a $6 billion reduction in these investments next year globally. As a result, it's hard to see how Cisco's IP switching business could recover. As for IP routing, Cisco has shown no signs that the segment will improve, as competitors like Alcatel-Lucent continue to steal market share and create headaches for the juggernaut.
With analysts expecting Cisco to grow revenue by 3% over the next year, and 4.2% in the year thereafter, I think it'll be hard for the company to meet these expectations. At that point, Cisco shares could come under significant pressure.
The article 3 Stocks That Could Burn Investors in 2015 originally appeared on Fool.com.
Brian Nichols has no position in any stocks mentioned. Rich Duprey owns shares of Cisco Systems. Rick Munarriz has no position in any stocks mentioned. Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and McDonald's. 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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