Our pans fall into two categories: companies with poor prospects and those with better prospects that trade at absurdly high prices. If you own any of these five stocks, consider dumping it, or at least paring back, especially if doing so won’t result in a taxable gain.
We start with three companies that pay generous dividends but appear to be struggling to keep up the disbursements. On the surface, profits seem to be rising at CenturyLink (CTL). But take out one-time items and the telecom company’s operating income and cash flow are down from a year ago, largely because customers are dropping their landline phones. Moreover, analysts expect virtually no profit growth over the next few years. What’s holding up the stock price is the fat $2.16-per-share annual dividend, which gives the stock a 6.4% yield. But CenturyLink cut the payout in 2013, and Brad Lamensdorf, co-manager of the Ranger Equity Bear ETF (HDGE), expects it to do so again within the next year.
A juicy dividend is also propping up shares of Diebold (DBD). The maker of automated teller machines is paying at an annual rate of $1.15 per share, and it has a long history of yearly dividend hikes. But those increases have gotten smaller as Diebold’s finances have gotten tighter. Declining sales, a major restructuring and the recent departure of the company’s chief financial officer all raise red flags. Plus, declining cash flow puts the dividend in jeopardy. Finally, the stock, at 18 times projected earnings, isn’t cheap. (All data are through Nov. 1.)
Dominion Resources (D) owns regulated electric utilities in Virginia and North Carolina, regulated natural gas utilities in Ohio and West Virginia, as well as various unregulated units. Analysts expect earnings to grow at a 7% annual clip over the next few years. That’s not terrible, but the stock sells for a lofty 18 times estimated year-ahead earnings. Also troubling is that Dominion has been borrowing money and issuing stock to support its $2.25-per-share annual dividend. The company can’t keep making those generous payments forever.
Turning to stocks in fantasyland, Tesla Motors (TSLA) undeniably makes great cars. Founder Elon Musk is considered a visionary in the same mold as Henry Ford. But Tesla’s stock, which has zoomed by a factor of seven since going public three years ago, is priced for a perfect future. It sells for 135 times estimated earnings for the next four quarters. Any stumble will deliver a nasty shock to Tesla bulls.
Like Tesla, 3D Systems (DDD) is a hot stock in a hot industry. Shares of the maker of three-dimensional printers have nearly quadrupled over the past two-and-a-half years. Although 3D’s printers could revolutionize manufacturing, the company needs to drum up interest among consumers to support a stock that sells for 53 times projected year-ahead earnings. That hasn’t happened, Lamensdorf says. The printers hit Staples shelves last summer, but his checks indicate that few have sold, apparently because they’re expensive and because consumer applications aren’t obvious.