Sell Mattel (MAT) and Schlumberger (SLB)
The broad market finally firmed up last week. After closing below their 50-day lines the previous Friday, the Dow, S&P 500 and Nasdaq all found support early last week, then rebounded strongly at the end of the week. The sharp dip followed by the strong rebound suggests we’ve just seen a shakeout, which can end a correction and set the market up for a new rally. The spike in the VIX and elevated put buying during the dip reinforce that view.
However, while the market is firming, four of our holdings stumbled on earnings last week. I moved Verizon (VZ) to Hold and recommended selling U.S. Bancorp (USB) on Thursday. And today, we’re selling Schlumberger (SLB) and Mattel (MAT). Even if the broad market is resuming its uptrend—in fact, especially if the broad market is resuming its uptrend—we want to be holding the leaders of the new advance, not laggards.
Here’s why SLB and MAT aren’t worth our dollars right now.
Sell Mattel (MAT)
Mattel (MAT) is trading slightly higher pre-market, and we’ll take advantage of the stability to sell our shares today.
I covered Mattel’s disappointing quarter pretty thoroughly on Friday, so today, I want to focus on four big reasons not to own MAT going forward:
First, the stock has no technical support here. MAT’s lack of a support level has been a concern for months, and now, a revisit of its 2015 low around 20 looks likely. Conversely, any move to the upside would face numerous resistance levels (and catalysts look lacking.)
Second, analysts have revised their estimates for Mattel downward. The consensus 2017 EPS estimate has fallen from $1.45 to $1.28, while the 2018 estimate has declined from $1.71 to $1.56. That means 2017 EPS growth expectations have shrunk considerably, from 37% to 21%, while 2018 expectations have risen only slightly, from 18% to 22%. In addition, margin improvement has stalled.
The third reason I don’t want to own MAT going forward is qualitative, not quantitative, but is based on two quarters of earnings misses. After fourth-quarter sales disappointed (even with aggressive discounting), the leftover holiday inventory contributed to Mattel’s first-quarter miss. Management expected the inventory hangover to clear and orders to pick up partway through this quarter, but they didn’t. Management now expects the inventory hangover to clear in the second quarter.
One quarter of low sales could be a blip, two starts to look like a pattern. Management’s one-off explanations may be hiding a more permanent decline in retail demand, which would mirror what most brick-and-mortar retailers are reporting. If that’s the case, further downward revisions and earnings misses are likely.
Lastly, the fourth reason to sell MAT now is its weakening margin of dividend safety. Cash flow continues to fall short of Mattel’s quarterly dividend obligation, and the longer this situation persists, the harder it will be for Mattel to avoid a dividend cut. Management’s latest comments also made it sound like the board may be considering a dividend cut in the near future. That would probably be good news for Mattel’s turnaround, but it’s pretty much goodbye for dividend investors.
In short, Mattel’s story, numbers, chart and dividend have all weakened. We’ll Sell today and put the money to work on stronger stocks; I suggest you do the same.
Sell Schlumberger (SLB)
Dividend Growth Tier holding Schlumberger (SLB) has been our problem child for a few months, and I said several weeks ago that we’d put a mental stop around 75. The stock closed below that level on Friday, so the sell decision here is simpler than for Mattel.
SLB’s gap down came after first-quarter revenue growth failed to meet expectations. In addition, 2017 and 2018 estimates have been revised downward.
Even though the earnings report wasn’t a disaster, SLB is acting like a loser, and we can do better. Sell SLB today and put the money to work in stronger stocks.