Yesterday I wrote about three summer stocks to buy now. These three companies represent stability and growth as well as a great way to profit from seasonal trends associated with all things summer.
On the flip side of the seasonal trends we see this time of year are several companies that investors should avoid. If you happen to own any of these stocks I would strongly suggest revisiting these positions to see if a change should be made.
Summer Stock to Avoid #1: The Walt Disney Company
Don’t get me wrong, Disney (NYSE: DIS) is a tremendous company.
With its world-class hospitality and amusement parks, box office genius and media dominance, Disney is a stock market gem.
But that gem is simply too expensive right now.
After riding a wave of momentum generated by its huge box office success with the movie “Frozen,” the stock appears to be overheated. Disney stock is up almost 20% since the movie’s release in November and 90% in the last two years.
What’s troubling is that its price-to-earnings (PE) ratio is also roughly double what it was two years ago. This means that as the stock price rises higher and higher, its valuation appears more and more expensive.
The chart below illustrates my thoughts well.
Source: Y Charts
With a PE ratio not seen since before the financial crisis, it is important to wait for a meaningful pullback in shares before picking up shares of this stock market gem.
Summer Stock to Avoid #2: SeaWorld
SeaWorld (NYSE: SEAS) has always drawn criticism for its treatment of animals that critics argue should not be kept in captivity. The scrutiny has intensified over the last year as the company defends itself against allegations that it did not do enough to prevent the deaths of trainers working with its famed killer whales.
A documentary about SeaWorld’s treatment of both animals and employees was released in January 2013 and seems to have greatly influenced how the general public views SeaWorld’s family of amusement parks.
Though the stock is up 5% so far this year, its historical performance is not good.
Down almost 15% in the past year and almost 10% since its 2013 IPO, the stock has not done well. The first quarter of 2014 was the company’s worst since its IPO. The company blamed weather and Easter falling later in the calendar but I’m not convinced.
SeaWorld faces a major image problem, one that I don’t think the company can recover from without significant change to its parks and business model. What’s even worse is that it seems the company is digging in on its denials of issues related to the killer whales in its parks.
Weak performance combined with a major image problem that management shows no desire to change is a very bad combination.
Summer Stock to Avoid #3: Six Flags Entertainment
Roller coasters, water slides and greasy amusement park foods are an essential part of summer for many Americans. And Six Flags Entertainment (NYSE: SIX) is a vital part of the amusement park landscape.
But not all amusement park companies are created equal. I wrote about Cedar Fair (NYSE: FUN) in yesterday’s article recommending three summer stocks to buy. Its rival, Six Flags, is one of my top three summer stocks to avoid.
Six Flags yields 4.6%, slightly less than Cedar Fair’s 5.3% dividend yield. But Six Flags’ dividend is considerably riskier.
With a payout ratio of less than 25%, I consider Cedar Fair’s dividend to be pretty safe. But Six Flags’ payout ratio is considerably higher, almost 50%. I worry that a particularly weak summer season or declining earnings would result in a dividend cut. At the very least, Six Flags has almost no room to increase its dividend while I expect such a move from Cedar Fair in the next two quarters.
Six Flags stock is also significantly more expensive than Cedar Fair’s when you consider the PE ratios of each. Six Flags trades at a PE ratio of 34.5 while Cedar Fair trades at a PE ratio of 22.2.
Meanwhile, Six Flags’ earnings are expected to shrink by 40% in 2014 when compared to its 2013 earnings. Cedar Fair’s earnings are also expected to shrink but by a much smaller amount, only 6.4%.
In a nutshell, Six Flags trades at a higher PE ratio for lower growth and a lower dividend, a dividend that is riskier than that of its rivals at Cedar Fair.
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