Abercrombie & Fitch (NYSE: ANF)
Even before the pandemic, consumer interest in this New York fashion chain was dwindling. Abercrombie & Fitch announced the planned closure of several flagship stores last year, including those in New York, Copenhagen, Milan and Fukuoka.
The retailer’s share price failed to recover after the chain reported a first-quarter loss in 2019. Not unlike one of its target demographics, ANF's price has been stuck in the mid to high teens ever since.
With many Abercrombie stores now reopening with limited hours, CEO Fran Horowitz said in a May call with analysts that the company is “encouraged by recent results, with customers returning to stores at an even quicker pace than in China.”
For now, Morgan Stanley says not to bet on Abercrombie & Fitch, remarking that “negative store traffic and apparel price deflation remain structural headwinds.” If you want help building out your portfolio, be sure to speak to a fiduciary financial adviser..
Cheesecake Factory (NASDAQ: CAKE)
While many analysts are recommending you put a slice of Cheesecake Factory into your portfolio after the market’s recent rally, Morgan Stanley's research team doesn't believe in the stock's potential at this time.
“We see downside risk … as the company has large mall exposure in a casual dining industry that was already challenged and now faces additional … difficulties brought by COVID-19.”
Many shopping centers were already struggling, and if things get worse because of COVID-19, restaurants attached to malls might see troubled times ahead. That seems to be true for Cheesecake Factory.
The company wrote a letter to its landlords stating it was unable to pay rent for its locations on April 1, paused all further restaurant development and drew on a $90 million line of credit.
The chain plans to reopen most locations by mid-June and says it expects its large properties to be perfect for socially distant dining as restrictions ease. It remains to be seen whether Cheesecake Factory can still turn a profit given the reduced seating and high overhead costs.
AMC Networks (NASDAQ: AMCX)
If you're a fan of turnaround stocks, AMCX might seem like it’ll escape the walking dead on the market. But given the recent market uptick, it's no longer a great value.
The company holds significant debt, and Morgan Stanley's research team notes that the company's revenue growth depends on "the performance of its original series, with revenue concentration in The Walking Dead..."
With the stock price down over 50% in one year, AMC Networks needs to find a way to break from the ongoing decline of cable television.
AMC Networks could be holding out hope for the runaway success of a new exclusive. Its recent acquisition of rights to Anne Rice's major works (think Interview With The Vampire) could be promising. But will it be good enough to convince cord-cutters to tune in? Time will tell.
H&R Block (NYSE: HRB)
H&R Block's assisted tax filing services might be a huge help to consumers come tax time, but what sets it apart from competitors could be the same thing that's holding it back.
The company operates more than 9,000 physical locations, and they could become a liability for the company amid increased competition from DIY tax software.
Morgan Stanley says the "stock will have trouble working without a path towards a positive inflection in assisted tax volumes.”
With government filing services becoming more user-friendly and disruptive startups launching a number of free services, the proportion of individuals searching out in-person tax assistance is likely decreasing day-by-day.
Molson Coors Beverage (NYSE: TAP)
This iconic merger between Canadian brewhouse Molson and Colorado-based Coors created the fifth largest producer of beer in the world.
The beverage giant, unfortunately, is all foam right now, according to Morgan Stanley researchers. The maker of legendary premium and domestic beers is experiencing slower growth as it fends off competition from local craft brewers.
While profitability saw some increases, Molson Coors' overall sales volume in 2019 was down 3.5% compared to the year before, and the company forecasted a tough year ahead.
Morgan Stanley also notes Molson Coors Beverage has a “below-average innovation track record over the last few years," but the company seems self-aware and is actively exploring new options for modern tastes.
United Parcel Service (NYSE: UPS)
Even though UPS’s stock price has been relatively stable through the pandemic thanks to increased online shopping, the company’s focus on shipping to consumers may not remain a strength for long.
Operations like UPS and FedEx are under threat as Amazon builds its own business-to-consumer delivery network, the financial news outlet Barron's explains.
“UPS could be more at risk of disruption [than FedEx] given its larger [business-to-consumer] business, unionized labor force and less flexible network,” Morgan Stanley's researchers say.
Both UPS and FedEx still do a lot of business-to-business deliveries, which could be a saving grace for the two companies in the face of competition from Amazon.
Alcoa (NYSE: AA)
Alcoa is well known as one of the largest aluminum producers in the world, operating out of Pittsburgh. But this commodity giant has fallen on tough times.
Commodity share prices are notoriously dependent on supply-and-demand shifts in the market.
Unfortunately for Alcoa, Morgan Stanley says: “Our commodities strategists expect the aluminum and alumina markets to be in surplus for several years, keeping prices low.”
Long-term shareholders of Alcoa saw a devastating drop of over 70% in the past three years, so a silver lining for new investors is that they'll be buying in at all-time lows. But given industry surplus, and the company's financials, it might be better to kick this aluminum can down the road.
Aramark Holdings (NYSE: ARMK)
The global health crisis struck a hard blow to Aramark Holdings, a company that provides food services (for schools, prisons, hospitals and stadiums), facilities and uniform services. The company's stock price plummeted to all-time lows, at which point it might have been a decent long-term buy.
But Morgan Stanley's researchers remain cautious, saying that the world following COVID-19 might very well put pressure on several aspects of Aramark's business.
They say “if work from home becomes more prevalent, this would have a long-term impact on volumes at corporate cafeterias … Similarly, if virtual learning gains more favor … this would impact Aramark’s Education vertical.”
The researchers also note that sports “attendance levels are likely to be down due to social distancing rules and people’s willingness to attend large gatherings.” That could continue to hurt Aramark's bottom line over the next couple of years.
Brinker International (NYSE: EAT)
Brinker's International runs two popular restaurant chains in America: Chili's and Maggiano's Little Italy.
The reason Morgan Stanley researchers feel EAT is unappetizing? Uncertainty over Chili’s sustained performance and increased competition generally in the bar-and-grill category.
MoneyWise previously wrote that Chili's seems to be failing to connect with millennials, with longer-than-expected wait times and customer reviews critiquing the overwhelming menu.
Researchers also say the company holds more debt than similar casual-dining chains — another cause for pause.
Michaels (NASDAQ: MIK)
The arts-and-crafts store has made its fair share of news during the pandemic for claiming to be an essential business and staying open. Given the company's financials, and the challenges it faces, it’s no wonder executives felt they couldn't afford to temporarily close their 1,200-plus locations for safety's sake.
Michaels reported declining sales to close out 2019, and on top of that, tariff tensions between the U.S. and China forced product costs to rise.
Morgan Stanley's researchers say the crafts retailer needs to increase sales and profit margins to turn things around, but they "don’t expect a material improvement in either in both the near- and long-term.”
How to invest during these turbulent times
If you’re evaluating stocks to buy, it’s better to mitigate your risk using low-cost ETFs (exchange-traded funds) or focus on stocks with solid financials that will net you dividend earnings.
ETFs like NYSEARCA: VTI or VOO that follow market performance have nearly completely rebounded since the crash. Companies like Principal Financial Group Inc. (NASDAQ: PFG) or Garmin (NASDAQ: GRMN) are worth looking at because of their solid dividend yields.
Do individual research into each ETF or company you’re investing in. With ETFs especially, you’ll want to check out what companies make up the majority of holdings, because not all diversification is equal.
You might consider automating at least a portion of your portfolio. Some investors have seen success by putting at least 10% of their investments into the hands of robo-advisors to mitigate risk — since roboadvisors only deal with ETF portfolios.