These Dinosaurs Are In Trouble

By: Spencer Israel

The triple whammy that Kraft Heinz (KHC) delivered to investors late last week reverberated throughout Wall Street.

Not only did the food conglomerate announce top- and bottom-line earnings misses, but they (more alarmingly) cut their dividend by 40 percent and disclosed an ongoing SEC investigation into the company’s procurement practices. Investors reacted accordingly, punishing the stock down 27 percent to an all-time low.

In a vacuum, this is bad news for Kraft Heinz and the consumer staples sector at large. But unfortunately, this is just the latest recent example of a once-dominant company in a legacy industry falling by the wayside. Call it a blue-chip stock losing its blue-chip status.

The Fall Of A Giant

The poster child for this is probably General Electric (GE). The 127-year-old industrial conglomerate has gone from being considered a titan of American industry to a cautionary tale after years of aggressive M&A left it with an over-leveraged balance sheet and a crushing mountain of debt.

Things finally came to a head in October after the company announced it would cut its dividend to $0.01 and try and sell off as many business units as possible.

As of this writing, GE had fallen 70 percent from its most recent highs in 2016. A company that was once the third-largest weighting in the S&P 500 can barely stay above $10/share.

An Overextended Telecom

CenturyLink (CTL) follows a similar formula to GE, though the recent struggles hinge on one very poorly timed acquisition. In this case, it was the $34 billion acquisition of Level 3 Communications that officially closed in October 2017.

The 88-year-old telecom company was already facing stagnating earnings that were consistently missing analyst expectations at the time of the deal, and the added debt needed to finance the acquisition did little to assuage investors.

That brought us to February 13, when the company announced a dividend cut of more than 50 percent. At about $13, shares of CTL are at a 22-year low.

A Pair Of Retail Disasters

J.C. Penney (JCP) has been in Wall Street’s dog house for most of the past decade now, having had only three profitable quarters since 2012.

The rebranding efforts of the Ron Johnson era (or more accurately, error) that involved the cutting of established private label brands and ending coupons proved disastrous, digging a hole that the 117-year-old company has been unable to climb out of. Between declining revenue and a general lack of consistent leadership (the company has had four CEOs this decade), and it’s no wonder shares of JCP closed below $1 for the first time ever in December.

Not to be outdone of course is the downfall of Sears. Years of mismanagement and a failure to properly transform operations to fit the internet (not to mention the ill-advised merger with Kmart in 2005) culminated in the 125-year-old former darling of America’s retail industry filing for bankruptcy in October.

Chairman Eddie Lampert may have won court approval to buy the company out of bankruptcy and prevent a total liquidation, but the long, painful march to zero was a painful reminder for investors that there isn’t always light at the end of the tunnel.

Lessons We Can Learn

All of these companies share several characteristics, the most notable probably being that they all tried to hide declining revenues through large acquisitions, accumulated unsustainable debt loads in the process.

From an investing standpoint, we know that no stock goes straight to $0 and the road to the end is paved with ups and downs. But the decline in these once great companies serves as a great reminder that we can’t let a company’s mythos cloud our judgment of the present.

Whether any of these proverbial dinosaurs can truly stage a comeback will hinge on their ability to clear their balance sheets of the toxic assets that got them here, and strip the company down to a leaner, more nimble version of its previous self. Only then will they even stand a chance at convincing investors that the worst is over.


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Disclosure: The author holds no position in the stocks mentioned.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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