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Thai and Cambodian people have long played “Makruk,” a Southeast Asian version of chess. Queens and bishops move more like checkers pieces, and pawns can turn into “Makruks” – or queens – once they reach the sixth row.
It’s a slower version of the standard game because fewer pieces can travel the entire board.
Investing often acts the same way. Most successful millionaires act like Makruk players – taking only small actions that build up over time.
By making positive moves and avoiding bad ones, these players come out far ahead of everyone else. According to Morningstar, it’s how relatively “average” management teams like Northern Small Cap can outperform roughly 90% of their competitors. You only need to buy some good stocks and avoid the worst.
That’s why this edition of InvestorPlace Digest is so special. This week, I’ve run the TradeSmith AI system, which we’ve been looking at here over the past few weeks, in reverse to identify five popular stocks to sell. These are highly respected companies that AI suggests will underperform the market over the next 30 days.
Even though avoiding these stocks won’t help you beat the game overnight, conserving your cash is like playing a game of Makruk. Over time, these small moves can compound into a resounding win.
5 Stocks AI Warns to Sell Immediately: AT&T (T)
This week, TradeSmith’s AI system drops AT&T (NYSE:T) to No. 2,977 out of 3,055 companies to sell immediately. It’s one of the few large-cap firms that finds itself so low on the list.
Marc Guberti agrees. On InvestorPlace.com, our free news site, he warns that AT&T is on its way to another dividend cut.
AT&T is a sinking ship that happens to have a high dividend yield. Some investors will still buy AT&T because of the high yield, but should remember it is high for a reason. Some dividend yields are too good to be true, and AT&T fits that description.
Essentially, Guberti worries that $9 billion per year in dividend payouts is completely unsustainable for a telecom firm that only generated $1 billion in free cash flow last quarter. The company has struggled to adapt to a digital world, and nimbler competitors are taking market share. AT&T’s history of failed acquisitions have also left the former “Ma Bell” with roughly $130 billion in total debt.
This means that AT&T shareholders could see another dividend cut soon. TradeSmith’s AI system warns investors to stay away.
In late June, Larry Ramer noted at InvestorPlace.com how several key investors were selling shares of America’s largest telecom firm.
Norges Bank, Norway’s central bank, headed for the exits on Verizon last quarter, dropping its entire stake of 46.4 million. Meanwhile, Shell Asset Management unloaded 13.7% of VZ, or 176,504 shares.
Lazard, Met Life, T. Rowe Price, and Nomura also sold significant portions.
This week, TradeSmith’s AI system adds Verizon Communications (NYSE:VZ) to its list of stocks to sell. The AI believes shares will drop 3.7% over the next month, a negative 36% annualized rate of return.
It’s easy to see why the pros are selling.
Verizon is stuck in a similar situation as AT&T – forced to spend billions to upgrade its nationwide 5G network while receiving no additional customer revenue for its troubles. (When was the last time Verizon raised its monthly rates on you?)
Wall Street analysts agree. They predict 2024 revenues will be the same as in 2022 and that profits will be 7.5% lower. Keen price competition from T-Mobile (NASDAQ:TMUS) and other cut-rate carriers have forced incumbents to play the same game.
On the surface, you might think that CVS … would be a fine stock. The company operates more than 9,600 pharmacies in the U.S. and has a reputation as a solid healthcare provider. … But that’s not translating into the stock price, which is down 22% so far this year, and by 29% over the last 12 months.
He noted that even meeting consensus estimates would represent a 5% year-over-year drop in earnings.
Within a week, CVS would announce a worse-than-expected profit outlook, sending shares down 5%.
This week, TradeSmith’s AI system joins Navellier in recommending investors sell this seemingly strong company. The system believes shares will lose 4.85% over the next 30 days, a negative 45% annualized rate of return.
Over the long term, however, CVS remains in a strong position. Its move into higher-margin healthcare services and Medicare Advantage plans will offset costs in the more expensive medical and pharmacy benefit businesses.
But until management stops pushing back their target dates, investors are better off selling CVS and taking a “show me” approach to management’s promises.
Church & Dwight (CHD)
Church & Dwight (NYSE:CHD) is a consumer goods company that owns Arm & Hammer, OxiClean, and other well-known household brands.
Ordinarily, CHD might seem like a no-brainer move for conservative players. Consumer goods companies like Kellogg (NYSE:K) and Unilever (NYSE:UL) have a long history of turning small fortunes into slightly larger ones with minimal volatility.
But this week, TradeSmith’s AI system rightly labels no-moat Church & Dwight as a company to sell. The AI model predicts that shares could fall 3.5% over the next month, which comes to a negative 34.8% annualized rate of return.
InvestorPlace.com’s Josh Enomoto notes why in a recent update:
I’m not seeing the justification for the premium based on its financial performances. For example, Church & Dwight’s three-year revenue growth rate (on a per-share basis) pings at a modestly positive 8.1%. However, CHD trades at 4.38 times trailing-12-month (TTM) sales, which ranks worse than 87% of its peers. So, unless you see a bullish hysteria for baking soda, CHD ranks among the high-risk value stocks.
In short, Church & Dwight has a valuation problem. The company only earns average returns on equity, yet trades at a stunning 32X forward earnings – over 50% higher than its long-term average.
The firm has also faced mounting issues with increasing brand value. Former successes like Nair in the early 2000s are now replaced by millstones like Zicam and Waterpik that have struggled to find broader markets.
Investors seeking stable long-term returns should look to wider-moat companies with a better recent history.
International Flavors & Fragrances (IFF)
Finally, TradeSmith’s AI system wraps up by recommending investors sell International Flavors & Fragrances (NYSE:IFF), a New York-based firm that dominates the ingredients industry. Shares are predicted to fall 4% over the next month, a negative 39% annualized rate of return.
This week, Ian Bezek published an InvestorPlace.com article that helps explain why:
International Flavors & Fragrances has not figured out how to keep growing profitably. Rather, it made a massive $6.4 billion deal to buy Frutarom which rapidly ran into troubles. Key employees and customers left and promised synergies fell far short. In addition, the company got caught up in a bribery scandal involving alleged improper payments in Russia and Ukraine.
Much like Church & Dwight, IFF finds itself struggling to repeat past successes. Analysts expect net income to fall 21% this year, driven by weak gross profit margins and rising research and development (R&D) costs. Earnings estimates have also been revised downward in the past 30 days, a short-term bearish indicator.
Still, the longer-term outlook for IFF remains bright. The company is an undisputed leader in its industry, and valuations are roughly at their long-term midpoint. In fact, current multiples suggest a 5% upside over each of the next three years.
But tactical traders will know that longer-term outlooks matter little for short-term profits.
IFF shares fell from the $150 range to $90 during the 2021 selloff. And AI models have concluded that the firm will likely see greater losses to come before an eventual turnaround.
Knowing When to Play Offense vs. Defense
Of course, even the most conservative Makruk players will know when to make big moves. Rooks can still travel the entire length of the board, and top competitors know when to use these valuable pieces.
Investing works the same way.
Cautious investors like Warren Buffett occasionally make enormously risky bets that look nothing like their more conservative plays. In May, InvestorPlace.com’s Rich Duprey noted how the Oracle of Omaha had bet an enormous sum on a company that had just cut its dividend from 24 cents to 5 cents.
It’s “not good news,” Buffett reportedly said about the stock. “We’ll see what happens.”
Yet, the CEO of Berkshire Hathaway has made these daring bets before, from scooping up American Express during the 1960 Salad Oil Crisis to buying Bank of America’s preferred shares in 2008.
Now, Luke Lango has identified the single most profitable sector in the market. While this sector makes up less than 1% of the total market… it’s responsible for over half of the top winners over the past 12 months.
Most investors stay far away from this tiny niche because it is one of the most complicated, intimidating, and regulated industries on the planet.
However, Luke and his team have spent months developing a system to bypass all the complications and unnecessary risks associated with this sector.
So far, his back tests are showing gains of 655%, 822%, and even 1,208%.
And on Tuesday, July 11, at 7 p.m. ET, Luke is going public with his findings. If you’d like to learn exactly what this sector is, a breakthrough way to start capturing some of these profits for yourself, and Luke’s #1 recommendation to play it, sign up for Luke’s event here.
As of this writing, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.