2 Sells and 2 Holds for Recovering Companies

By Meryl Baer - October 20, 2012 | Tickers: AEO, CROX, SBUX, GBX | 0 Comments

• Email
• Print

The economy teeters between tepid recovery and roaring revival, stagnant slowdown and recession. No one knows where the economy is headed, but everyone speculates. What we know are facts and figures. The third quarter is history and the stock market is doing fine.

Data from CNNMoney

We may wonder why the market surged, considering all the bad domestic and international economic news bombarding us daily. We may be skeptical about the market’s long-term strength. Election year dynamics adds an additional dimension of ambiguity. 

There is no news, then good news, then bad news, and then semi-encouraging news on the European debt crisis. There are encouraging numbers, followed by discouraging numbers, and more disappointing statistics on the economic slowdown in China.

The barrage of information 24/7 makes our heads spin. We want to do something, but too often end up immobilized into indecision.

Sell and lock in gains?

Most stocks plunged during the financial crisis. A lot of people took their money out of the market. But many held on, and quite a few investors have recouped losses. Some are ahead. That is not to say investors are doing great. Looking back 12 years to the beginning of the century, long-term returns are dismal. Previous estimates of optimistic portfolio growth and wealth accumulation went out the window with the tech bust, two wars, the Great Recession, the housing debacle, and the financial crisis. Now that stocks are recovering, many investors are thinking about selling and locking in gains.

Can a dramatic recovery continue?

Greenbrier Companies (NYSE: GBX), a rail freight and marine barge manufacturer, experienced decreased revenues as the economy sank. The stock price mimicked revenues, plunging to 3.66 in March 2009. Revenues increased dramatically in 2011 and the stock price followed, trading recently in the 15.50-16.50 range.   Assuming a recovering economy, the company should continue to recuperate and improve. The current P/E ratio is 7.235. Greenbrier should continue to thrive, increasing shareholder value. At the current price, Greenbrier is a buy for potential investors.

GBX data by YCharts

Starbucks (NASDAQ: SBUX) sank to single digits in 2008 and has since climbed, currently trading around 46. The company floundered for a couple of years, losing sales to cheaper coffee products heavily advertised by McDonald’s and Dunkin' Brands. Sales recovered with the introduction of new beverage and food products and cost cutting measures, including closing poorly performing and redundant stores. The following chart illustrates the steady increase in revenues and stock price appreciation Starbucks enjoyed over the previous four years. Management increased both earnings per share and the company's profit margin. Shareholders with unrealized gains may want to sell a portion of their position and lock in gains. Starbucks should continue to prosper, but at a slower pace. Potential investors should buy on a price downturn.

SBUX data by YCharts

Two Retail Chain Recoveries

It is difficult to predict the long-term viability of apparel manufacturers. Consumers are fickle and fads can make or break a company. Crocs (NASDAQ: CROX), known for their unique casual footwear, plunged into penny stock territory, trading under 1.40 from November 2008 through March 2009, then hitting a 26.97 high in October 2011, and again falling, currently trading in the teens. The recession and cheap reproductions that flooded the market negatively impacted sales. In response to a challenging economy and competitive pressures, Crox introduced new products, opened retail stores, expanded overseas, and is in recovery mode. Shareholders should hold for, hopefully, near-term price appreciation. The stock is a buy.

CROX data by YCharts

American Eagle Outfitters (NYSE: AEO), a mid-priced clothing chain targeting teenagers, young adults, children, and infants, is another company with a vacillating stock history. Striking a 9.01 low in January 2009, the stock bounced back to its current low 20s trading range. Management seems to have a knack for keeping their customers happy, showcasing clothing and accessories their young clientele like at prices parents can afford. The chart below, however, illustrates the fact that the stock's price and P/E ratio is out of step with recent revenues and earnings. Although the company's long term prospects are positive, the stock is due for a price adjustment downward. Shareholders might consider selling to lock in gains. Potential investors should watch the stock and buy on a price dip.

AEO data by YCharts

Does the market bode well for the economy, or is it a false positive?

Will the market continue to surge, perhaps hitting new highs in the foreseeable future? Will it take a break, moving back slightly or sideways as everyone catches their breath and waits for post-election information before deciding what to do next? Or will the market drop precipitously?

By the end of the year Congress may or may not decide to extend tax cuts. The payroll tax credit may expire. QE3 may help stimulate the economy. Businesses may have a better idea of health care expenses and responsibilities post-election. Following the election the certainty of who will be President for the next four years and which party or parties control the House and Senate should allow for more confident long-term decision-making and planning.

I predict the market will move sideways until Election Day. The stock market, usually an indicator of future economic activity, seems to signal promising growth.

• Email
• Print
• Feedback