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10 Stocks to Dump Now Before the Crisis Begins

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10 Stocks to Dump Now Before the Crisis Begins 10 Stocks to Dump NOW Before the Crisis Begins By Harry S. Dent Jr., Founder of Dent Research YOU wouldn t know it from watching the stock market, but it
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10 Stocks to Dump Now Before the Crisis Begins 10 Stocks to Dump NOW Before the Crisis Begins By Harry S. Dent Jr., Founder of Dent Research YOU wouldn t know it from watching the stock market, but it s about to get rough out there. Every day we add more debt to the books is one day closer to the global financial and economic crisis that will bring deflation into our lives and send the price of stocks and gold tumbling to never-before-seen lows. In The Great Deformation, David Stockman wrote that the entire central-bank-centered political and economic establishment was at risk of total collapse as investors finally realize that the emperor has no clothes and that money printing is not the secret to long-lasting prosperity. As we edge inexorably closer to that day, it s time you not only rethink the value of gold but also how you approach the stock market and your investment portfolio. Many stocks that you might have held for the past decade and which have performed fantastically well over that period are about to face a very different reality. America is, in a lot of ways, the last man standing. Europe is doing everything it can to fight off the threat of deflation. Japan has been stimulating like there s no tomorrow. And China has begun it s efforts to stem the tide. The Chinese government openly admitted what the commodities markets have been telling us for months: China s days of miraculous growth rates are over, and they re not coming back. China is playing an impossible game of trying to slowly deflate a property and debt bubble without also starving the real economy of credit. Even if they are able to pull this miracle off which would be hard under even the best of circumstances we can t expect China to pull up the rest of the world economy like it did after Right now, the entire world economy resembles a fragile house of cards. We can t say in advance which final card will cause the entire structure to collapse. But we can certainly prepare for it. There will be plenty of good trading and investment opportunities ahead, both in buying and shorting stocks. But here I ve put together a list of 10 stocks you should dump, just like gold, and sooner rather than later. In fact, now would be ideal. These are stocks that we consider particularly at risk due to shifting demographics, loss of faith in the global central banking system, and a weaker economy ahead. If you own any of these, dump them. There are better opportunities with less risk elsewhere. 1. Mattel (NYSE: MAT) To start, I recommend you dump Barbie. I m talking, of course, about children s toymaker Mattel, the maker of Barbie dolls, Disney Princess dolls and Matchbox Cars, among others. 1 No, I m not hating on Barbie. But Mattel has a very difficult demographic outlook ahead. American births peaked in 2007 and have been falling ever since, as a bad economy made planning for a family a lot more difficult. From 2007 to 2013, annual births dropped from 4.3 million to 3.9 million. Since the peak in 2007, we ve had about 1.5 million missing babies that were never conceived due to the rough economy their would-be parents have faced. And here s the reason you want to dump this stock now: those babies that were never born in 2008 would be reaching their prime age for expensive toys right about now. Fewer kids means less demand for toys now and demand gets worse every year for the foreseeable future. You don t want to own a stock with deteriorating demand for its products with no end in sight. Even if the American birthrate ticked up tomorrow, it s too late. Babies born today will be a boon to Mattel years from now, not today or even next year. And Mattel can t look overseas for help. Fifty-four percent of its sales come from the U.S. and Canada. Europe deflation-wrecked Europe, where birthrates are even lower than in North America accounts for another 25% of sales, with most of the remainder split between Latin America and Asia-Pacific. Hey, Mattel could always surprise us with a hit new toy. But the company is facing a demographic cliff, and there is no source of new demand to bail the company out. Sell this stock now, before Wall Street fully appreciates this. You can always buy it back in the early 2020s, when the family formation of the millennials suggests an uptick in demand for toys. 2. Hasbro (NYSE: HAS) If it s true for Mattel, then you can bet it s true for rival Hasbro as well. Hasbro has held up better than Mattel lately. Some of this is based on hope that the upcoming Star Wars movie, Episode VII: The Force Awakens, will be a toy-buying bonanza. Hasbro has the rights to Star Wars toys and merchandise. The company has done a better job than Mattel of monetizing its toy brands in movies, TV, and video games. For example, the Transformers franchise has been a fantastic money maker, spawning multiple movies and animated cartoons for kids. Hasbro has also practically minted money by riding on the coattails of the Marvel comic book movies. With another Avengers movie coming out later in 2015, Hasbro will probably make a windfall selling Iron Man, Hulk and Captain America toys and gear. But after that Hasbro s prospects look iffy. While Hasbro s toys are more in demand than Mattel s these days, it still suffers from the same long-term problem: a lack of kids to buy its toys. You can have the best collection of toys on the planet, and it won t matter if your pool of would-be buyers is shrinking. Unless parents suddenly get more generous and decide to buy more toys per kid, you re looking at a tough environment to grow your business. Like Mattel, Hasbro gets a large chunk of its revenues from parts of the world that look even weaker than the U.S. Forty-eight percent of sales come from outside North America, with 31% of that coming from Europe. Another 10% comes from Latin America. Weak foreign currencies relative to the dollar (which I explained in How to Survive (and Thrive) the Gold Bust Ahead) are going to be a major drag on Hasbro s earnings for the next several years. If the demographic story wasn t convincing enough, the currency story certainly should be. It s time to dump Hasbro. The demographic picture starts looking better in the early 2020s, but you re looking at several tough years ahead. 2 3. Disney (NYSE: DIS) Next up is the Walt Disney Company. This might come as a surprise because right now, things look pretty good for Disney. The Frozen franchise is bringing in money by the boatload, and the upcoming Avengers movie is expected to be a hit. But you should use any strength in the stock to unload your shares, because Disney s fortunes are about to change in a major way. Disney, like Mattel, is about to get stung by the great birth dearth of the late 2000s and 2010s. Fewer babies born five to seven years ago means fewer Mickey Mouse fans today. This alone would be reason enough to be leery of Disney s stock. But Disney would have other major macro issues to deal with even without the baby bust. I ll start with cord-cutting. Paid TV is very much a product for the middle-aged. Millennials don t pay for TV in traditional and expensive cable packages. Nearly one in four millennials have either cut the cord, canceling their paid service or have never had cable to begin with. They get their content for free, over the airwaves, or through cheaper services like Netflix or Amazon. This is a problem for Disney, to say the least. Its media networks which include ESPN, the Disney Channel and ABC account for about 40% to 50% of revenues in any given year. Thus far, baby boomers and Generation X have kept overall cable subscriptions stable. But the writing is on the wall here. Dish Network just fired the warning shot that may be the beginning of the end for the traditional TV model. Starting in early 2015, Dish has offered a $20 no-contract, bare-bones cable package. It includes ESPN but interestingly, it doesn t include ABC, which viewers can get for free over the airwaves. ABC, NBC, CBS and Fox gets about half their revenues from retransmission fees that the cable companies pay to include the networks in their lineups. You take the cable companies out of the equation, and these traditional networks suddenly see their profit model disappear. Sell Disney now and plan on staying away for the foreseeable future. 4. Freeport-McMoRan (NYSE: FCX) Few companies benefited as much from the rise of China and few stand to suffer more from its long decline than global mining giant Freeport-McMoRan, a diversified miner, with major operations in copper, gold, molybdenum and cobalt. It also has smaller oil and natural gas operations. While all of these segments would appear to be at some degree of risk and I talked at length about gold s future in How to Survive (and thrive) the Gold Bust Ahead and 3 Safe Havens for the Gold Bust it s copper the company s biggest segment that looks the most at risk. Copper is one of the most economically-sensitive commodities due to its use in construction, and about 45% of the total is used by China. China is the copper market. And that s a very big problem because China is close to having a real financial crisis and meltdown. The Chinese government is desperately trying to gently deflate a housing bubble without causing a bona fide crash and taking down the banking sector too. It s a delicate balance and one that they re not likely to pull off. But guess what: even if China avoids a major blow-up, Chinese demand for copper is about to fall off the cliff. And when it does, you don t want to be anywhere near a copper-mining stock. About one out of every five new homes in China is currently sitting unoccupied, and Chinese construction is slowing. Worse, supply of new copper has outpaced demand for several years running, with much of the excess sitting in Chinese warehouses. China is practically drowning in copper. 3 The market doesn t seem to fully grasp this yet. Yes, copper prices continue to slide, but if the full extent of China s imbalances were priced in, you d see an outright collapse. And that is exactly what I expect. Copper started 2015 at $2.84 per pound. I expect it to trade for half that amount a year or two from now. Lower copper prices are a death knell for Freeport-McMoRan. If you own the stock, dump it and move on. With the commodity supercycle over, Freeport may not be attractive again for a decade or more. 5. Continental Resources (NYSE: CLR) Harold Hamm is better known these days as the man who had to write a check for $975 million to his exwife in one of most expense divorce settlements in history. But Hamm actually has bigger problems than a billion-dollar divorce. You see, Hamm is an old-school oil wildcatter, and his oil company, Continental Resources, is one of the major companies hit hardest by the collapse in crude oil prices. Continental is one of the largest independent oil and gas exploration and production companies in America. Unfortunately, most of it is shale oil, which is a lot less competitive now that oil prices have collapsed. The majority of Continental s operations are in the Bakken shale region of North Dakota. You don t have to be an oil and gas expert to see how this might be a problem. And making it worse, Continental is highly leveraged, with about $6 billion in debt. I ve been forecasting that bankruptcies in the energy sector will cause a collapse in the junk bond market. Continental might might avoid that fate. But even under the best-case scenario, the going looks rough for this company. I see the price of crude oil ultimately falling below $20 per barrel. At that price, Continental is out of business. If you own Continental Resources, dump it. Don t be surprised if this company actually goes bankrupt. 6. Transocean (NYSE: RIG) If Continental s situation looks dire, offshore drilling contractor Transocean amazingly looks worse. As its ticker symbol suggests, Transocean owns and operates oil rigs. As the oil majors continue to cut costs, it s contractors like Transocean that take the brunt of it. Existing offshore fields are cheap to keep running, but new exploration is very expensive. And until oil prices show signs of life, don t expect to see the oil majors throwing a lot of business Transocean s way. At first glance, Transocean looks like a value investor s dream. The shares trade for less than 40% of book value and sport a respectable dividend yield. Or at least they did. Transocean had to cut its annual dividend in February from $3 per share to $0.60 per share. Before this oil rout is over, I expect the dividend to be slashed to zero. Stocks slashing their dividends are toxic waste to own. Momentum investors are shorting them, and value and income investors won t touch them. They are stocks with no buyers, and they re not something you want to own. If you own Transocean, dump it now. 7. Alcoa (NYSE: AA) Next in line is aluminum giant Alcoa. When I look at Alcoa, I don t see a company with any single large risk, like falling crude oil prices. Instead, I see it as death by a thousand cuts. With China slowing, demand for metals in general should continue to slow (never mind that the 30-Year Commodity Cycle remains south bound until into the 2020s). But with consumer demand in the U.S. and the rest of the developed world also looking to continue slowing, demand for aluminum in aircraft, autos and consumer electronics should be modest as well. 4 Even military spending looks a little iffy these days. The U.S. is not likely to make any major spending upgrades to the military for at least the next few years. And the other major military powers are either too broke to up their military spending (Europe) or are under stiff sanctions (Russia). A year ago, the auto industry might have looked like a good source of demand, with Ford announcing an aluminum-bodied F-150 pickup. But with falling gasoline prices making the fuel efficiency gains of questionable value, I wouldn t expect much of a boost here. Alcoa is an economically-sensitive stock, and with most of the world flirting with recession and outright deflation, it makes no sense to own this. Demand for aluminum looks to stay weak for probably the remainder of this decade. If you own Alcoa, dump it now. 8. McDonald s (NYSE: MCD) It s hard to find a stock more hated than McDonald s. Normally, when I see sentiment that lopsided against a company, I m tempted to bet the other way. But in the case of McDonald s, this is a company that finds itself facing a one-two punch of stiff demographic headwinds and disastrous foreign earnings. McDonald s faces the same problem that Mattel and Disney face: a shortage of kids. Few selfrespecting adults regularly eat at McDonald s of their own accord. To the extent they go at all, it is because their kids want to play on the playground or perhaps want the latest Happy Meal toy. Well, those kids are going to be in shorter supply for another several years. Another major blow comes from a shrinking pool of teenagers and early 20-somethings. High school and college kids eat at McDonald s because it s in their price range. But as the millennials have moved past this stage of life and into healthier diets, there is no one to replace them. The last baby bust the one in the 1990s has left us with comparatively fewer high-school-aged and college-aged kids to wolf down Big Macs. But if all of this wasn t bad enough, overseas sales, which make up more than two thirds of total revenues, get zinged by the appreciation of the U.S. dollar, something I expect to continue (with the brief dip during the middle of 2016 when the Fixed Income Trade of the Decade becomes available). And this is really the impetus to sell today. The demographic issues, while serious, will take several years to fully play out. But the weakness of foreign earnings is hitting McDonald s bottom line today. A strong dollar is death for McDonald s. If you own it, dump it. 9. Yum! Brands (NYSE: YUM) What s true for McDonald s is even more true of Taco Bell, Pizza Hut and KFC. These are the major fast food brands that make up global fast-food empire Yum! Brands. American dining habits have gone upscale over the past two decades, moving from Taco Bell to Chipotle Mexican Grill to get that Southwestern fix. A lot of this is based on demographic trends, as people tend to take their health a lot more seriously as they age. But it also reflects higher living standards and, frankly, better taste in food. Yet Yum! isn t really an American story. It s a Chinese story. Yum! gets about half its revenues from China. You know my view on China. It s the ultimate bubble economy, and it s going it to blow up in spectacular fashion. When that happens and it will soon Chinese consumers will not be spending their disposable income on meals at Taco Bell. And even if they do, their depreciated currency will translate to sharply lower earnings. 5 This is the biggest risk to Yum!, and Wall Street doesn t seem to be appreciating it. Yum! trades at a nosebleed valuation of 33 times earnings. That s a valuation I would expect to see on a high-flying new technology stock, not the parent company of Taco Bell. You don t want to be left holding the bag when this stock reverts to a more sensible valuation. If you share our concern about China, then Yum! is a stock you should dump immediately. Because as goes China, so goes Yum! And frankly, this company faces very stiff headwinds for years to come. 10. J.C. Penney (NYSE: JCP) And finally the red-headed stepchild of U.S. retail, J.C. Penney. The sad thing here is that you can t point to one particular thing wrong with J.C. Penney. In fact, after a disastrous attempt at modernization that almost killed the company a few years ago, It has gotten back to its roots and is actually doing a lot of things right. But sadly, it will all be for naught. In a rough retail environment, it s survival of the fittest. Only the strongest competitors survive. And poor J.C. Penney is about as far from the fittest as you can get. J.C. Penney will probably not survive the next recession, and its competitors will be picking over its carcass was a strong year for the U.S. economy. You know as well as I do that much of the growth was a result of Fed money printing. But be that as it may, we saw a lot more dollars sloshing around the economy last year. Yet J.C. Penney say sales fell during that time and its revenues are down about 30% since It hasn t turned a profit in four years. Yet its debt load has continued to grow, up more than 80% in just two years, and it continues to bleed cash. Worse, most of its high-quality assets such as its store buildings, many of which are located in prime locations have already been pledged as collateral on its debt. You can t even say you re buying J.C. Penney for its assets because at this point, they no longer really belong to the shareholders. If J.C. Penney is struggling this hard in a strong economy, how long do you think it will survive in the next real recession? Don t be seduced by the turnaround story here. Hedge fund wizard Bill Ackman tried to fix Penney and failed. Actually, he made it worse, if you can believe that. Follow Ackman s example and dump the stock. I expect it to be bankrupt well before the end of this decade. 6 Publisher...Shannon Sands Editors...Harry S. Dent and Rodney Johnson Chief Investment Analyst...Adam O Dell Dent Research 55 NE 5th Avenue, Suite 200 Delray Beach, FL USA USA Toll Free Tel.: (888) Contact: Website: Legal Notice: This work is based on what we ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It s your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not
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