NEW YORK (TheStreet) -- Online retail is booming, but just because sales are trending higher, doesn't mean all stocks are, too.
The so-called Internet and catalog retailing industry encompasses more than 16,000 companies. Sales are shifting from catalog stores to Internet retailers. Amazon (AMZN) and Overstock (OSTK) are two successful examples of how the industry has evolved, according to TheStreet Ratings.
"The evolution of secure user interfaces and the increased convenience of online shopping are expected to drive growth in the coming quarters," according to TheStreet Ratings. "Although the broader retail industry is expected to remain sluggish during the slow recovery from the U.S. economic slowdown, the Internet will help drive sales."
That said "the next phase of e-commerce growth will require retailers to innovate and invest in technologies that optimize the connection between online and offline elements," TheStreet Ratings said. Additionally, any failure to address cybersecurity risks, credit card fraud and other consumer fraud could hurt sales.
Not all online retailers are getting it right though. The list below notes companies whose growth prospects aren't as strong or those that have deteriorating profit margins, with shares suffering as a result.
One good example is Zulily, a daily deals Web site that has seen its share price fall because of lower sales and slow customer growth. The company is a recommended "sell" by TheStreet Ratings, despite e-commerce giant Alibaba (BABA) amassing a 9% stake in a bid to further expand out of China.
The stocks on this list are Internet retailers, rated "sell" with a D+ or worse rating. Find out which stocks to sell and when you're done, be sure to check out which Internet software and services companies to add to your portfolio.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year. Note: Year-to-date returns are based on May 13, 2015 closing prices.DANG data by YCharts
8. E-Commerce China Dangdang Inc. (DANG) (ADR)
Market Cap: $752 million
Rating: Sell, D+
Year-to-date return: -1.6%
E-Commerce China Dangdang Inc. operates as a business-to-consumer e-commerce company in the People's Republic of China. It primarily sells books, periodicals, electronic publications, consumer electronics, and audio-visual products through its Website dangdang.com.
"We rate E-COMMERCE CH DANGDANG -ADR (DANG) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself and poor profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- DANG has underperformed the S&P 500 Index, declining 6.68% from its price level of one year ago. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.
- The gross profit margin for E-COMMERCE CH DANGDANG -ADR is rather low; currently it is at 17.67%. It has decreased from the same quarter the previous year. Regardless of the weak results of the gross profit margin, the net profit margin of 1.30% is above that of the industry average.
- E-COMMERCE CH DANGDANG -ADR reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, E-COMMERCE CH DANGDANG -ADR turned its bottom line around by earning $0.17 versus -$0.30 in the prior year. For the next year, the market is expecting a contraction of 2.9% in earnings ($0.17 versus $0.17).
- DANG has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.38 is very weak and demonstrates a lack of ability to pay short-term obligations.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Internet & Catalog Retail industry and the overall market on the basis of return on equity, E-COMMERCE CH DANGDANG -ADR has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- You can view the full analysis from the report here: DANG Ratings Report
FTD data by YCharts
7. FTD Companies Inc. (FTD)
Market Cap: $833 million
Rating: Sell, D
Year-to-date return: -19.6%
FTD Companies, Inc., through its subsidiaries, operates as a floral and gifting company primarily in the United States, Canada, the United Kingdom, and the Republic of Ireland. The company operates through four segments: Consumer, Florist, International, and Provide Commerce.
"We rate FTD COMPANIES INC (FTD) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself and unimpressive growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The share price of FTD COMPANIES INC has not done very well: it is down 6.89% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet & Catalog Retail industry. The net income has significantly decreased by 78.8% when compared to the same quarter one year ago, falling from $9.62 million to $2.03 million.
- FTD COMPANIES INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, FTD COMPANIES INC turned its bottom line around by earning $1.17 versus -$0.12 in the prior year. This year, the market expects an improvement in earnings ($1.81 versus $1.17).
- Compared to other companies in the Internet & Catalog Retail industry and the overall market on the basis of return on equity, FTD COMPANIES INC underperformed against that of the industry average and is significantly less than that of the S&P 500.
- 37.17% is the gross profit margin for FTD COMPANIES INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 0.55% trails the industry average.
- You can view the full analysis from the report here: FTD Ratings Report