11 Companies With Lost Narratives Also Lean Toward Poor Earnings Reactions

Investing

Published: August 4, 2017 7:35 am

Last Updated: January 12, 2020 9:27 am

Some companies manage to rise into a dominant position in their industries. Whether they can hold on to that dominance through time is another story. It turns out that it can be quite simple for a great company to fall from grace. Once a company stays out of the spotlight for some time, the public and investors may cease to care what the company says or does.

24/7 Wall St. just recently featured 11 great American companies that have totally lost their own narratives. It turns out that, while not all the stocks have continued to slide, these companies have by and large demonstrated very poor or dull earnings. And some of the companies still have earnings due later in August.

It is important to understand exactly what is at work here. The bull market is now well over eight years old, and investors keep finding new reasons to chase the market into all-time highs. At the start of August, the Dow hit 22,000 for the first time and was up over 11% so far in 2017 alone. The S&P 500 was up almost 11%, and the Nasdaq 100 was up 21% year to date. It all adds up to a very sad situation for the companies that lost their narrative with poor stock performance and weak earnings trends.

Investors love good stories around sales and earnings growth. They love dividends, and they love buybacks. And they love stability and predictability if nothing else is apparent. When companies have lost their narrative, their actions and words generally become ignored — unless there is drastic change.

After companies lose their narrative, they are almost never shown in a positive light. It is very hard for company to sell itself as a “cheap value stock” because management knows this means investors don’t want to pay a good value for the business. Some of these companies end up merely being “value traps” that never generate good returns for investors. Some companies lose their narrative to the point that they may have existential risk ahead. The end result is that companies losing their own narrative also find themselves under a microscope for short sellers.

24/7 Wall St. has updated its report on the 11 great American companies that have all lost their own narrative. Again, not all the stocks continued to slide, though many did. What matters is that these companies are likely to remain unfavorable in a bull market until someone can force a recovery or can make major changes to their operations.

AutoZone: Awaiting Earnings

AutoZone Inc. (NYSE: AZO) is currently the largest retailer and distributer of auto replacement parts and accessories, after annual sales of $10.6 billion in 2016. There has been endless growth here over the years, but now Amazon and other online competition have added pressure at the same time that wages have risen in many regions. Competitive pricing is great for consumers, but it generally means lower margins for retailers. This stock was down 35% over the course of a year prior to being featured, and now it is valued at only about 11 times forward earnings.

AutoZone has not reported earnings since late in May, so it is trading around peers at this time. AutoZone was last seen changing hands $529.29, up from $504.00 when it was featured as having lost its narrative. AutoZone’s consensus analyst target price was about $661.50 then, but it has dropped by a few pennies since.

Bed Bath & Beyond: Awaiting Earnings

Bed Bath & Beyond Inc. (NASDAQ: BBBY) sells all sorts of home goods for bedrooms, bathrooms, kitchens, utility rooms and so on, and the retailer used to be able to do no wrong. The death of Linens-n-Things was a boon, but Amazon and competition online and from big-box sellers has chewed it up. Bed Bath & Beyond has managed to keep growing its sales to $12.2 billion in fiscal 2017, but its operating income has been in decline as selling general and administrative costs keep rising. Bed Bath & Beyond peaked at about $80 a share at the end of 2013, and investors are treating this declining earnings story as dirt, even as it is valued at less than eight times expected earnings.

Bed Bath & Beyond has yet to report earnings, and its shares have risen since being featured. Its stock was at $28.50 at the time, and the last trade was at $30.54. Its consensus target price of $32.74 at the time is still the same today.