The Federal Reserve’s recent prediction of a potential recession in the United States this year has brought attention to a fresh batch of dividend stocks to avoid. These stocks may already be facing challenges, and a downturn in economic activity could be the catalyst that pushes them over the edge.
Identifying these issues early allows investors to potentially rotate their portfolios toward a more defensive posture rather than continuing to invest in struggling stocks. Although the market has likely priced in some of the problems these stocks face, accurately assessing the extent of these issues is often difficult and only fully revealed in hindsight.
In this article, I argue that the market has not fully acknowledged or priced in the challenges these stocks face, causing them to trade at premium valuations relative to their future intrinsic values. As a result, I believe that a sell recommendation is warranted at the present moment.
My analysis focuses on stocks that were once protected by strong competitive moats, which are now quickly eroding. To reverse their fortunes, these companies would need to overcome significant execution risks and, in many cases, completely revamp their business models. Considering the balance of probabilities and making the fewest assumptions, I find these outcomes unlikely.
Tanger Factory Outlet Centers (SKT)
Tanger (NYSE:SKT) is a troubled real estate investment trust () that owns factory outlet centers across the United States. With the rise of e-commerce and the continued centralization of trade to brands like Amazon (NASDAQ:AMZN), its tenant base is facing problems, which is pressuring its top and bottom lines.
The company’s revenue growth, net income, and operating cash flow per share have all charted into negative territory over the last three years. On a per-share basis, its operating cash flow growth is negative 10%, net income growth is negative 14%, and revenue growth is negative 14%.
The issue at hand though is that Tanger’s moat of providing high-quality, well-located outlet centers for bargain shoppers is under direct threat of being undercut by bigger e-commerce companies like Amazon and eBay (NASDAQ:EBAY). These firms will gladly sell their products at a loss if it means gaining market share and potentially putting its retail competitors out of business. If Tanger’s tenants are competing on cost alone, as most discount outlets do, they will surely lose against online brands that don’t spend a dollar on physical floor space or even carry physical inventories, such as the case of drop shippers.
However, the enduring enjoyment of in-person shopping will keep many of Tanger’s tenants afloat, but a more compelling value proposition other than being the cheapest must be explored, which may be difficult for less sophisticated tenants to execute successfully. A blindsiding recession may leave them with little time to respond.
Pitney Bowes (PBI)
Pitney Bowes (NYSE:PBI) is a company that may have another antiquated competitive advantage at risk. The brand operates mailing and shipping solutions for businesses of all sizes. It also has established partnerships with entities like the United States Postal Service (USPS) and companies like FedEx (NYSE:FDX).
Pitney Bowes has seen its three-year operating cash flow per share shrank 9% over the last three years, contributed mostly by higher operating costs. This is despite its revenue growth and net income per share rising 44% and 20%, respectively.
Although the threat to Pitney Bowes isn’t as imminent as other stocks on this list, it is looming on the horizon, and it is unclear how the company will respond. The emergence of digital-first mailing and shipping solutions could overtake the brand, which carries lower costs and more user-friendly operations for small and medium-sized businesses. Furthermore, as e-commerce continues to grow as an industry, more entrants in the shipping space are expected to join, causing price compression on Pitney’s margins and earnings. Its strategic alliances may mean less when there are far more providers for consumers.
New Media Investment Group (GCI)
New Media Investment Group (NYSE:GCI) operates a network of local newspapers and other print publications with a focus on developing relationships with the communities it serves. This moat has allowed it to survive up until now, but print continues to decline, and a renaissance for traditional media seems highly unlikely.
New Media Investment Group is already a loss-making business, both in terms of accounting profits and cash flow. Its free cash flow stands at a negative $4.6 million at the time of writing, while its net loss is more at $78 million. To make matters worse, the brand has a negative interest coverage ratio and a significant debt burden of $1.38 billion. When one examines its price-to-sales (P/S) ratio, we can see the market has severely discounted its future prospects, as it stands at only 0.08, a remarkable figure.
The company’s main threat comes from online marketing giants Alphabet (NASDAQ:GOOG, GOOGL) and Meta Platforms (NASDAQ:META), allowing advertisers to target users on a far more granular and behavioral level than placing ads inside print magazines and newspapers. The hyper-local nature of the brand’s publications may be the only thing that’s providing stability to its moat, but this protective advantage is meaningless if print earnings continue to decline. Local papers may always be around as they serve a specific community purpose. Still, the smaller distribution of papers may mean the brand must reinvent itself as a smaller enterprise and share price to boot.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.