U.S. stocks this week fell 50% from their peak, which would have been unimaginable a year ago. But after scouring big companies' financial reports, the declines are understandable -- double-digit drops in revenue, billions of dollars in impairment charges and staggering net losses.
TheStreet.com Ratings' quantitative model rates 49% of the companies it covers "sell," 43% "hold" and only 9% "buy." The model takes a "safety-first" approach, emphasizing dividend yield and risk. During bear markets, such a model can be helpful in cutting through the clutter and evaluating stocks on a fundamental basis.
Below is a chart and review of 10 large-cap U.S. companies, which reflect the brutal business environment. All have a "sell" recommendation from The Street.com Ratings. No industry is spared -- from media to energy to consumer electronics and health care.
Time Warner was downgraded from "hold" to "sell" on Feb. 5, mainly due to a horrendous fourth-quarter earnings report that showed a loss of $4.47 per share. The majority of the loss was due to asset impairments that can be classified as one-time charges and are omitted for analysts' purposes. But they still count as a strike against TWX in the model, as well they should, because they represent lost value to shareholders. Even on an adjusted basis, TWX missed analysts' estimates. Also, poor stock performance versus the S&P 500 factored into the downgrade.
Devon Energy had a similar knock against it. A $7.1 billion non-cash charge due to the reduced value of its oil and gas properties was a major blow to the most recent earnings results. The quarterly loss per share was $15.46. Accompanying this were major drops in every profitability ratio. The operating margin, for example, narrowed from 42.1% in the fourth quarter of 2007 to negative 363% a year later. The stock also underperformed the S&P 500.
Covidien has avoided the big, glaring losses of Devon and Time Warner, but nauseating volatility in the past quarter has made our safety-first model shy away. COV is also priced at a premium to its peers in terms of price to cash flow and PEG (price to earnings/growth) ratios.
Royal Philips Electronics
Another victim of a poor earnings announcement is Philips. The conglomerate posted a loss of $2.21 a share in the fourth quarter, dragged down by falling sales. Sales sank 20.3%, bringing the operating margin to negative 0.06% from 9.61%. Operating leverage is crushing PHG, and our model has taken notice.
Yahoo shareholders everywhere must be thinking the takeover bid by
of $30 a share sounds pretty good at this point. Since that offer last February, Yahoo has slid 57.9% to $12. Our model sees Yahoo as expensive relative to its peers, with a price-to-earnings and PEG ratio well above the average. Yahoo is also projected to record below-average sales and earnings growth.
News Corp.'s fourth-quarter results featured a 42.3% decline in adjusted operating income over the previous year's period. That, combined with a non-cash impairment charge of $8.4 billion, led to a loss of $2.45 per share. News Corp. is quick to point out that when the impairment charge is excluded, the company has earnings per share of $0.12. However, even that figure missed analysts' estimates by $0.07. The stock has sunk 67.2% over the past year. As with Time Warner, NWS is suffering from shrinking advertising budgets, which lead to lower revenue from ad placements.
Boston Scientific's net loss deepened in the fourth quarter, hitting $2.43 billion, which was $2 billion more than in the previous quarter. BSX is one of the few stocks on the list that has not recently fallen to a "sell." Our quantitative model has had BSX listed as a "sell" since we started tracking the stock. The hard times are expected to continue as BSX is projected to trail its peers significantly in both earnings and sales growth rates.
Applied Materials is a company that feels like it should be a "buy" since it is in trendy industries like green tech. However, with the operating margin dwindling to a negative 4.75% in the most recent quarter from a solid 20.26% in the previous year, it seems the company has not been able to capitalize on the push toward eco-friendly tech. Applied's biggest division, semiconductors, has been registering reduced orders, leading to a revenue decline for the company as a whole. This is a good example of a company that may benefit from the green initiatives in the government's stimulus program. With earnings and sales growth expected to fall below those of competitors according to our model, it seems that a wait-and-see approach is best for AMAT.
Symantec's goodwill impairment charge was $7 billion in the most recent quarter. The loss per share was $8.23, with an ROE of minus-150.17%, down from 31% in the previous year's quarter. Even when the view is narrowed to include only cash events, SYMC still ends the most recent quarter with a decrease in its cash balance by $813.1 million. Cash flow from operations decreased by 40.4% over the previous year. There aren't any positive figures that could help the company's rating.
Tyco is the most volatile stock on this list, with a beta of 1.13. Considering the volatility of the market as a whole over the past year, a beta value of over 1 says something about the rollercoaster that can be expected for investors in TYC. Analysts are expecting growth of about minus-51.1% in the current quarter versus the S&P 500's minus-34.4%. In other words, stay away.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.