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Tesla has yet to introduce autonomous flying vehicles but that hasn’t stopped the stock from taking off to new heights this month. As individual investors on Robinhood, catching the move that Tesla has made recently is all of our dreams. It’s also a “cool” company that most of us enjoy talking about. The CEO even makes EDM music in his spare time.
Tesla, along with Microsoft and Apple are much loved stocks. All three have gone on enormous runs in the past year, inspiring plenty of FOMO from those of us who weren’t on board. Should you jump in now? Maybe, but it’s undeniable that these loved tech names are becoming increasingly crowded trades. A crowded trade is where many investors have the same idea and crowd in to particular stock or fund. The problem is when this crowd gets nervous that the stock they love may not be all it’s cracked up to be, it can lead to a stampede for the exits, and big losses for those still holding.
Crowded Trade Case Study: Under Armour (UA)
To understand how you can get burned on a crowded trade, consider athletic apparel company Under Armour (UA). The stock had a great growth period starting in 2013. All of the elements of a loved stock were in place. Visionary founder. Celebrity athlete endorsements. It even had an app, giving the shoemaker the sheen of a trendy technology company. As the stock rolled on, financial pundits speculated that UA would eventually replace Nike at the top and utilize technology in new ways that justified a valuation well beyond a traditional athletic apparel maker. The stock responded in kind, rising from under $13 per share in 2013 to more than $50 by 2016.
However, 2016 didn’t finish as a good year for the company. Retailers that were major customers, such as The Sports Authority, went belly up. Analysts also noted a slowdown in earnings growth. The stock ended up declining 28% in 2016—but the worst was yet to come.
In its first earnings report of 2017, Under Armour’s streak of sales gains, which had so excited investors in previous years, came to an abrupt halt after an abysmal holiday season. The stock dropped 26% in the immediate aftermath and has yet to come anywhere near recovering its previous heights. As soon as investors had their faith shaken in Under Armour’s invincibility they rushed out the door and onto the next shiny object. That translated into a lot of selling and pain for those still holding the stock.
The company now faces a long climb back into Wall Street’s good graces as it faces additional trouble from an SEC accounting probe. The stock has lost more than half its value since those giddy days of early 2016.
Under Armour is just one example of what happens to a crowded trade that fails to materialize according to investors’ dreams. The result is usually that the stock goes from the top shelf to the bargain bin, and very fast.
Contrarian Investing: Seeking Out Hated Stocks
One way to avoid crowded trades is to focus on stocks that are at the other end of the spectrum: hated. Either hated by the market, society or the press. This type of contrarian investing is one favorite tool of value investors, those that look for stocks trading below their intrinsic value. This type of investing can be very fruitful or very frustrating, depending on your ability to identify a catalyst that will change the market’s mind about the trajectory or value of the stock in question.
Below we present some stocks that are hated for various reasons at a time when the loved stocks are very crowded trades, indeed.
Who doesn’t love to hate a cigarette company? With the mainstream investing community increasingly moving to reward socially responsible or highly rated ESG (Environmental, Societal and Governance) companies, Altria won’t be on the top of many investors’ lists. Beyond its reputational risks, Altria’s big plays for the future—vaping and cannabis—both seem to be fizzling out. Altria’s huge investment in JUUL was recently written down to one third of what it paid for it as the vaping company seems to be legislated out of existence, at least in the US. Meanwhile, cannabis stocks have been in a notable downtrend as new supply floods the market, hurting companies such as Cronos, which Altria also invested in at a high valuation. By the way, did we mention Americans don’t smoke cigarettes much anymore? Cigarette volumes continue to decline annually for the maker of the Marlboro Man.
Altria’s stock has been in the ashtray since mid-2017 where it peaked at $77.28. Despite some false dawn rallies, such as when the JUUL deal was announced, the stock has struggled to stay above $50 per share and currently trades around $45 at the time of writing.
It’s hard to get excited about this company’s future, but the stock does have some things going for it, including a committed customer base that has shown the ability to keep smoking through ever increasing price hikes on their product. The stock also currently offers a fantastic dividend yield north of 7%. Tobacco stocks have been the cornerstone of many conservative and income oriented investors portfolios for generations and that won’t change as long as Altria can protect its impressive dividend.
It should be noted that JUUL is far from dead as an enterprise and may find success abroad, particularly in emerging markets where higher percentages of people smoke. Altria also has the resources to develop its own “innovations” in nicotine delivery such as heat-not-burn cigarettes, tobacco-free nicotine pouches and its own vaping products. The company also has a number of other product offerings outside the tobacco space, from wineries to a 10% stake in beer maker Anheuser Busch. A last catalyst could be the revival of the cannabis industry as it shakes off early growing pains and finds more profitable avenues for its products, particularly if nationwide legalization happens in the near future. Altria is potentially well-placed to bring its tobacco expertise into the legal cannabis market.
Student loans are perhaps the only industry that could rival tobacco for most hated, particularly among the millennials who make up the industry’s customer base. Nobody brags about having a student loan the way they would about having a Tesla. Navient (NAVI) is the poster boy of the industry, representing more than $300 billion in outstanding student loan debt across 12 million individual borrowers.
Navient has been a favorite punching bag of politicians and the media for years now, both for representing the scourge of student debt excess and for its allegedly deceptive policies. In particular, the stock has shuddered anytime a candidate such as Elizabeth Warren or Bernie Sanders approaches a White House bid.
While policies such as total student loan forgiveness present an existential threat to Navient, investors need to weigh the likelihood of this policy being enacted through both Houses of Congress. Such a policy would not just impact Navient but a large swathe of financial services companies, many of whom have dedicated congress people supporting their cause.
If you’re willing to navigate the political risks surrounding this company, you might be surprised at the fundamentals you see there after taking a closer look. Strong and consistent earnings, a high dividend yield over 4%, and an increasingly diversified portfolio including investments in fintech and healthcare make this company look like more than just an unpopular and stodgy loan provider.
If you think student loans will still exist in ten years, then Navient is likely to remain a leader in the space. If Trump or a centrist Democrat friendly to Wall Street wins the White House in 2020, this stock will have at least some of the legislative uncertainty removed, and make it easier for investors to focus on the fundamental story underneath the bad headlines. Navient stock has been range bound for some time and currently trades at $14.57 per share.
Teva Pharmaceuticals (TEVA)
If student loans and cigarettes don’t gross you out, what about opioids? Teva (TEVA) is not alone in producing the painkiller that has devastated many communities, but the Israeli pharmaceutical company was a big player in producing them. This fact has shown an unwanted spotlight on the company, which is now involved in numerous lawsuits with local governments seeking compensation for the societal after-effects of opioid addiction in their communities.
Beyond pressure on the stock from its opioids business, Teva also ran into trouble with its balance sheet. In 2015, the company purchased Actavis Generics from Allergan, which resulted in a huge debt load that the company is struggling to manage to this day. The volatile drug space is a constant battleground for generic drugmakers, which offer cheaper alternatives to name brand prescription medicine and often results in lengthy court battles to determine if a generic version of a medication can be offered to consumers.
However, after a major decline in its share price last year, the shares have rallied as investors have noted progress in the company’s restructuring plan designed to reduce its debt size. Past history in many corporate litigation cases shows that the worst case scenario for situations such as the opioid issue rarely play out for companies. And the company has had some notable wins in their drug pipeline, including receiving an early approval in Japan for a new migraine drug.
Investors looking for a catalyst here should keep an eye on Teva’s future earnings reports, especially with regards to its progress on reducing its debt levels.
Exxon Mobil (XOM)
As Tesla’s rise shows, fossil fuels are so passé. The biggest company associated with oil in most investors’ minds is Exxon Mobil (XOM). They had a notable oil spill, their former CEO was a highly ranked Trump administration official and the price of oil has been in the doldrums for years now. Pretty much the opposite of a loved stock, right?
What really makes people hate a stock, though, is poor returns. Down 13% already this year, Exxon is on track to have a negative year for the fifth time in seven years. It’s returned an abysmal 3% annualized over the past fifteen years.
Unfortunately for Exxon investors, the near term picture continues to look bad. The price of oil has been hit by concerns over global growth related to the coronavirus. The US continues to ramp up production of shale oil, keeping a firm lid on the price for oil. And then there’s Tesla and other electric vehicle makers, whose success could significantly reduce long-term demand for gasoline.
While the picture certainly looks bleak now, Exxon does have some positives. The company is known as a best-in-class operator and has the financial resources to withstand long-term and drastic declines in the price of oil, unlike the smaller shale producers. In a worst case scenario for the price of oil, Exxon would likely be in a position to buy up assets at fire sale prices from other smaller bankrupt competitors and hold on until the price recovers.
The stock has also paid a strong, consistent dividend over the long-term, engendering a sense of loyalty among many retail investors who rely on the income. Finally, Exxon has the research and development resources in place to gradually transition to an alternative energy world, including investments in wind and solar energy. The company has the cash flow and non-core assets to sell to potentially transform itself as a broader energy company, rather than just an oil & gas outfit. Keep in mind too, we have yet to hit “peak oil” demand globally.
Wells Fargo & Co. (WFC)
Wells Fargo (WFC) went from Wall Street wunderkind to pariah in a few short years. The large bank was initially riding high after sidestepping the nastiest excesses of the subprime mortgage crisis and was rewarded with its acquisition of the less fortunate Wachovia in the immediate aftermath. Wells Fargo had the sheen of a bank that did things differently and its reputation stood out among most of the other major banks that the media, public and politicians took to task for their reckless behavior.
My, how times can change. Wells Fargo is now one of the most hated institutions in the space (which is no small feat) after dealing with the fall out from multiple scandals related to unscrupulous sales practices, including opening unwanted accounts for customers in order to hit unreasonable sales targets set by the executive team. The scandal has wiped out numerous executives and left the bank with a huge task in restoring customer trust. They are routinely targeted in the press and on Capitol Hill and will likely be under a regulatory microscope for many years to come. They also have class-action lawsuits to look forward to as a result of the fake accounts scandal.
As a result of all these headaches, the stock has failed to keep up with some rivals in share appreciation, including the likes of the much better loved JP Morgan Chase. The stock has trailed the banking sector over three and five year periods according to Morningstar and is down again nearly 10% this year when most other major banks have rallied off the back of strong earnings reports.
While Wells Fargo may not look like a great play today, there are some reasons to think the future may be brighter. The bank has a history of strong underwriting, which served it well during the Financial Crisis, and may do so again during the next recession (whenever that occurs). It also seems that the bank is taking action to streamline its operations. While this may mean difficult cost-cutting, including laying off up to 10% of its workforce in the near term, long-term this could provide a boost to its bottom line.
Investing in hated stocks is not easy. Most hated stocks are hated for a reason. You may have objections to their products or executives. If you’re willing to do the work of finding a credible catalyst however, identifying hated stocks could turn into a potentially profitable pursuit.