Historically, the stock market tends to trend higher over the long term. However, that doesn't mean you can simply throw a dart and pick a winning stock. in theory, you have just as much of a chance of picking a loser as a winner, meaning there are plenty of stocks potentially on the "avoid" list.
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With this in mind, we asked three of our contributors to offer up one stock that you couldn't pay them to buy. Here's what they had to say.
Sean Williams:If I were to pick a company to steer clear of, it would be Valeant Pharmaceuticals , which looks like nothing more than a value trap.
Valeant Pharmaceuticals has a handful of factors that are attracting current investors. Its forward P/E of just over 3, the fact that a consortium made a bid for Valeant six weeks prior, and its core assets comprised of Bausch & Lomb and Salix Pharmaceuticals give hope to investors that Valeant can weather the current storm and push higher. As for me, I see Valeant's uncertainty extending for some time to come.
For starters, Valeant is working with more than $30 billion in debt on its balance sheet. This debt is a major constraint on Valeant's corporate flexibility, and it has cut off Valeant's primary source of growth: mergers and acquisitions. If you recall, Valeant Pharmaceuticals failed to file its annual report on time in mid-March, triggering letters of default from its lenders. Although it managed to eventually file its 10-K on April 29, its lenders have essentially cut off any access to additional lines of credit. Without M&A, Valeant's growth trend could come to a grinding halt.
Additionally, Valeant is facing a number of ongoing probes into its operations and pricing practices. At the heart of the issue is its pricing of cardiovascular drugs Nitropress and Isuprel, which it acquired in Feb. 2015 and promptly raised the price of by 525% and 212%, respectively, without changing the formulation or manufacturing process. It's possible that Valeant pricing practices could result in pricing caps or fines, which could further damage its business.
I suspect that even if Valeant can turn itself around, things are going to get worse before they get better. I'd avoid Valeant and wait for clear signs of the clouds clearing before you consider dipping your toes in these waters.
Steve Symington:With shares of Ruby Tuesday hovering near their lowest levels since the financial crisis, value seekers might find themselves tempted to take a bite of the restaurant chain. But I think Ruby Tuesday has much more work to do before investors can deem it worthy of a place in their portfolios.
Image source: Flickr user Mike Mozart.
Ruby Tuesday stock suffered its most recent steep plunge after the company released weaker-than-expected fiscal Q3 2016 results in April, telling investors revenue fell 5.1% year over year, to $271.5 million, hurt by a combination of restaurant closures and a 3.1% decline in same-restaurant sales (or a less severe 1.7% same-restaurant sales decline excluding severe weather). Meanwhile, Ruby Tuesday's adjusted net income -- which notably excludes expenses related to those closures -- dropped 16%, to $1.6 million, or $0.03 per share. Based on generally accepted accounting principles, however, Ruby Tuesday lost $3.1 million last quarter, or $0.05 per share.
Ruby Tuesday simultaneously announced the resignation of its CFO, Jill Golder, who it turns out jumped ship to accept the same post at thriving competitor Cracker Barrel Country Store . And to make matters worse, earlier this week the company announced the sale of its Lime Fresh Mexican Grill concept, effectively muting any hope for the promising fast-casual brand to help supplement the turnaround of Ruby Tuesday's namesake concept.
To Ruby Tuesday's credit, management expressed optimism their brand initiatives will improve guest counts, with CEO JJ Beuttgen noting remodeled locations and restaurants featuring the new Garden Bar initiative have yielded a healthy lift in sales. But considering this will mark the fifth straight time Ruby Tuesday has ended a fiscal year with fewer locations than it started following multiple failed attempts to rejuvenate its brand, I think investors would be wise to watch its progress from the sidelines until we have more concrete evidence of a return to sustained, profitable growth.
Brian Feroldi:The consumer electronic space is well known for being brutally competitive and the industry is littered with companies that have failed to provide their investors with lasting returns. That's a big reason I personally have no interest in ever investing inFitbit's stock, and why I think it's a stock that should be avoided.
Despite my bearishness, a glance at the company's financial performance over the past few years is actually quite impressive. Sales topped $1.8 billion last year, up more than sixfold since 2013. Better yet, Fitbit's gross marginsincreased over the same time period, coming in at 49% last year. That's a higher number than evenApplecan claim.
Image source: Fitbit.
So if revenue and profitability are all on the rise, why do I think the stock should be avoided?
There's no doubt that Fitbit is the leader right now and its brand is synonymous with the health-tracking trend, but I have my doubts that this will still be the case five years from now. After all, consumers already have a huge number of choices available for low-priced fitness trackers -- just type "cheap fitness tracker" into your favorite search engine to see what I mean -- and the number of new entrants into the market should only increase in time. Is Fitbit's brand name really strong enough to allow it to keep its edge? I have my doubts.
The situation looks equally as challenging on the high end, too. Under Armourrecently launched its $400 HealthBox kit, which CEO Kevin Plank called out as the second best-selling e-commerce item that they have. Let's not forget that the Apple Watch is also a fitness tracking device as well, and version two is expected to roll out later this year. Both of those companies have far better brand recognition than Fitbit does, so what's to stop them from taking huge chunks of market share?
The final nail in the coffin for me is the device's replacement cycle. If I already own a Fitbit and love it, why would I need to buy another one? How about the users who only wear the device a few times and then put it in their drawer to collect dust?
With so much competition cropping up and a questionable replacement cycle, I have a hard time believing that Fitbit will be able to maintain its market share without having to give signifiant price concessions. If Fitbit's profitability takes a serious step back, that could cause shareholders a lot of pain.
Add it all up and I think that Fitbit is riding a trend right now that is simply unsustainable. With shares down more than 70% from their 52-week high, it also appears that Wall Street doesn't have a lot of faith in this business, so I think Fitbit is a stock to avoid.
The article 3 Stocks to Avoid originally appeared on Fool.com.
Brian Feroldi owns shares of Apple, Under Armour (A Shares), and Under Armour (C Shares). Sean Williams has no position in any stocks mentioned. Steve Symington owns shares of Apple, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Apple, Under Armour (A Shares), and Valeant Pharmaceuticals. It also owns shares of Under Armour (C Shares), recommends Fitbit, and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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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