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Cult Stocks Cut Down

Thursday, August 6, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET
You can also access this issue on our website.
Cult Stocks Cut Down in Latest Challenge for the Market
Market Roundup
Dow -120.72 to 17,419.75
S&P -16.28 to 2,083.56
NASDAQ -83.51 to 5,056.44
10-YR Yield -0.034 to 2.234%
Gold +$3.00 to $1,088.60
Oil -$0.43 to $44.72

By Mike Larson

Keurig Green Mountain (GMCR).

Tesla Motors (TSLA).

Fitbit Inc. (FIT).

The list of “cult” (or fad) stocks getting hammered today is long. And those beatings are yet another challenge for a market that’s already under fire.

What’s a cult stock? A company that makes only a handful of products, but that garners tons of media attention because those products are (or were) red hot. It doesn’t hurt if you have a glamorous, press-savvy CEO, or if you go public in a high-profile IPO that surges big-time on day one.

I wrote about a handful of them last October, citing King Digital Entertainment (KING), SodaStream (SODA) and GoPro (GPRO) as prime examples. While King has basically gone sideways since then, SodaStream just hit a fresh all-time low yesterday. GoPro is down about 30%.

Now, it’s the latest crop of cult names that’s suffering. Keurig tanked 30% today after the maker of single-serve coffee machines (and a soon-to-be-released countertop soda maker) warned of weak sales and earnings. The firm also said it would lay off 330 workers, roughly 5% of its employee base.

Keurig Green Mountain warned of a weak earnings outlook, and its shares took a major hit.

Tesla shares dropped 8.9% after the battery-powered carmaker lowered its 2016 production outlook, and admitted to production problems on its Model X SUV. The company is also burning through gobs of cash by investing in product development and factory expansion, with its second-quarter net loss of $184 million almost triple the level of a year ago.

As for Fitbit, it just went public in June and has been climbing ever since. But shares of the maker of wearable devices to track exercise and health statistics tanked 13.6% today despite the company crushing earnings and sales estimates for the quarter. The issue? Questions about the sustainability of its momentum and profit margins in an increasingly competitive field.

The market action today shows both the opportunity and peril of investing in cult names. If you get in (and out) early, you can make a killing. If you overstay your welcome, you can get killed.

My preference in an unsteady market like this one is to avoid these kinds of names entirely. Instead, as editor of Safe Money Report, I focus on higher-yielding, higher-rated, higher-stability names that offer more “Steady Eddie” kinds of returns, or deeply beaten-down, dirt-cheap stocks that have already had the froth wrung out of them. In a challenging market, that’s where you want to be.

So do you own Keurig, Tesla or Fitbit? Have they been good to you, or are you done with cult stocks? What kinds of alternatives look more attractive to you, if any? Or is this market so challenging, it’s time to just batten down the hatches and raise a ton of cash? Let me hear about it over at the Money and Markets website.

Our Readers Speak

Rates, rates and rates – those were being discussed actively on the website in the last 24 hours, and for good reason. The Federal Reserve is making more noise about raising them now than at any time in the last several years.

Reader Frebon said the Fed should move now so it has ammunition later if it needs to cut them again to counter an economic slowdown. The comments:

“They have to raise. If they were smart, they would raise it twice this year by 50 basis points each … but that is pie in the sky with this bunch. If China and Europe keep slowing down, the chance we will go close to or even enter a recession within two years is a real possibility. The Fed would then have no say in the outcome and no bullets left if they don’t raise.

“We need some inflation — and the velocity of money coming into this country will be astronomical if they raise aggressively. Also, finally savers will benefit and those on fixed incomes will have more to spend. The banks can also go back to their core business instead of taking on more and more risk.”

Reader Vibhaker B. added that a move is likely coming within the next couple of months. The comments there:

“I think the Fed will now hike in September or October. They have prepared the markets with repeated opinions by Fed governors and Chairman Yellen. They know the rates have to rise, and with unemployment rate continuing to fall, it is time to move so they can get a few hikes in place before we get into Presidential election cycle.

“Their main concern is to avoid a market meltdown. So by gradually changing the nuance and individual governors expressing their preference for a hike, they have kind of got the market to come to terms with a fait accompli.”

But not everyone is convinced the Fed will or should hike at this time. Reader Tradewinds said: “It sounds like they’re planning to tighten just like they did back in the 1930s — which is amazing since today’s ‘they’ fault yesterday’s ‘they’ for tightening. Today’s ‘they’ also say those hikes caused the problems back then. Go figure.”

“I expect turmoil and volatility will pick up even more when and if the Fed decides to act.”

Reader Chuck B. also said he’d be surprised if the Fed pulled the trigger anytime in 2015. His view: “It’s hard to believe the Fed will raise rates this year. That would cause all debt to become more expensive, and since our economy is now built on debt, that would be very deflationary and kill any recovery for at least some time.”

Thanks for sharing your thoughts here. The “Will they or won’t they?” game has been going on for a long time, but it does appear we are finally on the threshold of a move.

The markets are already reacting to that possibility, well in advance of an actual hike. I expect turmoil and volatility will pick up even more when and if the Fed decides to act. That’s why I’ve been singing a much more cautious tune lately.

If you haven’t weighed in yet, don’t miss your chance. Go to the website and let me know what you’re thinking as soon as it’s practical for you.

Other Developments of the Day

BulletThe food giant Mondelez International (MDLZ) is in activist investor Bill Ackman’s sights. The Pershing Square Capital Management investor has built up a 7.5%, $5.5 billion stake in the company, and started to pressure it to cut costs, boost revenue more quickly, or merge with a rival.

Mondelez has a profile of food brands that include Oreo cookies, Ritz crackers, Trident gum, and Philadelphia cream cheese. The company itself was spun out of the old Kraft Foods in 2012.

BulletAt least one policymaker pushed for an interest rate hike today … in the U.K. The Bank of England’s decision-makers voted 8-1 to keep rates at 0.5% there, and pointed to muted inflation as a reason not to move forward just yet. But strong wage and job growth in the U.K. makes it likely the country will be neck-in-neck with the U.S. in the rate-raising race.

BulletPresident Obama is continuing his push to get Congress on board with the Iranian nuclear deal. In a speech at American University yesterday, he said that a “no” vote on the deal would push the U.S. toward war with Iran at some point down the road. It remains to be seen if he can convince Republicans (and some Democrats) with his approach.

BulletThe Securities and Exchange Commission voted in favor of forcing companies to disclose how much more CEOs make than average workers yesterday. USA Today chose the moment to release an analysis of S&P 500 pay, in conjunction with Glassdoor.com.

Its review showed that the average S&P 500 CEO makes 216 times his or her median employee. Believe it or not, that was actually smaller than the 373-to-1 ratio the AFL-CIO found using different methods earlier in 2015.

Is pay at the top of the corporate ladder out of control? Do you think Obama’s PR blitz will (or should) convince reluctant legislators? Are you planning to watch the GOP debate later tonight? If you do, let me know who you thought was the big winner, and the big loser.

Share your thoughts on these or any other news stories at the website.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

For more information and archived issues, visit www.moneyandmarkets.com.

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