These companies would be hurt in a downturn.
In a bear market, quality companies weather the storm best and ultimately survive to thrive during the next bull market. Unfortunately, companies with poor fundamentals and deteriorating businesses are typically the most vulnerable stocks. These companies can be the first to lose business and market share when customers get tight with their spending. In addition to the risk of bankruptcy, these stocks also tend to take the biggest hits when investors trim the fat to shore up their portfolios. Here are seven stocks to avoid in the next bear market, according to former Kase Capital hedge fund manager Whitney Tilson.
Next:Community Health Systems (ticker: CYH) Credit
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Community Health Systems (ticker: CYH)
Community Health Systems owns, leases or operates 160 hospitals in 22 different U.S. states. CYH stock is already down 92% in the past five years. Starting in 2005, Community Health Systems spent roughly a decade taking on massive amounts of debt to acquire the majority of its hospitals. Since 2005, debt skyrocketed from $1.6 billion to $16.4 billion, yet same-store patient admissions at the company’s mostly rural hospitals dropped more than 20 percent. Tilson says the combo of rising debt and a business in secular decline makes CTH stock a long-term loser.
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These companies would be hurt in a downturn.
In a bear market, quality companies weather the storm best and ultimately survive to thrive during the next bull market. Unfortunately, companies with poor fundamentals and deteriorating businesses are typically the most vulnerable stocks. These companies can be the first to lose business and market share when customers get tight with their spending. In addition to the risk of bankruptcy, these stocks also tend to take the biggest hits when investors trim the fat to shore up their portfolios. Here are seven stocks to avoid in the next bear market, according to former Kase Capital hedge fund manager Whitney Tilson.
Community Health Systems (ticker: CYH)
Community Health Systems owns, leases or operates 160 hospitals in 22 different U.S. states. CYH stock is already down 92% in the past five years. Starting in 2005, Community Health Systems spent roughly a decade taking on massive amounts of debt to acquire the majority of its hospitals. Since 2005, debt skyrocketed from $1.6 billion to $16.4 billion, yet same-store patient admissions at the company’s mostly rural hospitals dropped more than 20 percent. Tilson says the combo of rising debt and a business in secular decline makes CTH stock a long-term loser.
J.C. Penney Co. (JCP)
Mall retailer J.C. Penney is having enough trouble surviving in a decade-long bull market. It may take a miracle for it to make it through the next economic downturn. Despite aggressively closing its worst-performing stores, management says investors can expect same-store sales to continue to decline in the middle single digits through at least the end of 2019. Inventories were down 16% in the first quarter, yet gross margins still fell by 0.5%. Fitch recently downgraded J.C. Penney’s credit rating to B-, citing the company’s negative free cash flow and $3.9 billion in debt.
AT&T (T)
At first glance, AT&T may look like a great defensive stock to buy during a market downturn. The stock pays a 6.4% dividend and it trades at a forward earnings multiple of just 8.7. However, Tilson says AT&T is a classic value trap. Bank of America is projecting earnings per share growth of less than 3% annually for at least the next three years. In addition, the firm is projecting revenue will contract in 2020 and 2021. AT&T’s value is solid, but its business is stagnant with little clarity on long-term growth.

IBM (IBM)
Tilson describes the IBM business model as an “inexorably melting ice cube.” IBM management has been promising a new direction for years, but that transition has been extremely slow-moving. In the first quarter, IBM reported 12% cloud revenue growth and 15% growth in its “as-a-service” revenue. Unfortunately, overall revenue was still down 4.7% due to the secular decline in IBM’s core legacy business. Tilson says investors shouldn’t be fooled by IBM’s single-digit forward earnings multiple or its 5% dividend yield and should avoid the stock ahead of the next bear market.
Children’s Place (PLCE)
Children’s Place shares have performed relatively well over the past three years. The company reported a 4.6% decline in same-store sales in the first quarter. First-quarter comp sales were better than the double-digit declines the company called for in its guidance. However, management said the second quarter is off to a slow start, with same-store sales down 20% and e-commerce sales down in the single digits compared to a year ago. Management expects a return to same-store sales growth in the second half of 2019, but Tilson says PLCE stock is “absurdly overvalued.”
Conn's (CONN)
Conn’s is a brick-and-mortar retailer of home furnishings and appliances. However, the company also offers credit services to its credit-constrained customers. CONN stock is up 95% over the past three years as the company eliminated some of its worst-performing product segments and improved its financing standards. However, financing customers with lower-quality credit is a recipe for disaster in an economic downturn, as mortgage lenders in the early 2000s learned the hard way. Tilson says investors should be extremely careful with CONN given that the company is essentially a “subprime lender masquerading as a retailer.”
Hertz Corp. (HTZ)
Ridesharing companies Uber (UBER) and Lyft (LYFT) disrupted the taxi industry, but Tilson says they are also putting major pressure on rental companies like Hertz. Epsilon-Conversant recently reported that 56% of previous car rental customers stopped renting cars completely in the past three years. Tilson says privately held Enterprise is also gaining share from within the rental market. Enterprise is larger and more efficient than Hertz, according to Tilson. To make matters worse, Hertz reported a net loss of $147 million in the first quarter and has $16.3 billion in net debt.
Stocks most hurt in a bear market.
Community Health Systems (CYH)
J.C. Penney Co. (JCP)
AT&T (T)
IBM (IBM)
Children’s Place (PLCE)
Conn's (CONN)
Hertz Corp. (HTZ)
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Wayne Duggan, Contributor
Wayne Duggan has been a U.S. News & World Report contributor since 2016. He is an expert at ... Read more
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