The S&P 500 Index's worst performing stocks for the year so far have been plagued, at times, by simple poor performance and, at other times, by events supposedly beyond their control — like the BP oil spill.
Regardless of the explanation, the approaching earnings season could prove a make-or-break moment for these laggards, as investors seek sure signs of recovery in results.
A review of stocks in the S&P 500 Index revealed 82 companies that have seen their market values decline by 10% or more for the year-to-date. Those occupying the bottom of the barrel, however, have shed between 30% and 40% of their market value.
In the coming weeks, these companies will announce quarterly results and the markets will be monitoring management comments closely for cues on whether recovery is in the cards for them.
The following list is ranked in order of the largest percentage declines. Read on to find out what has ailed these stocks — and what to expect from the biggest S&P 500 dogs of 2010 in the second half of the year.
1. Medical device maker Baxter International took a knock after management lowered its 2010 sales and EPS guidance after the first quarter to reflect significantly slower growth in the plasma protein market.
Management lowered its market growth estimate from 5-6% to 1-2% on the back of weaker demand for expensive plasma treatment procedures. (See year-to-date chart)
In May, the company announced that its first-quarter results would take an additional charge of $400 million-$600 million following the company's recall of its Colleague pumps. The management said its 2010 guidance would be unaffected by the call.
Rick Wise of Leerink Swann wrote in his May 2010 report that he expects the stock will be be "dead money" in the upcoming quarters until the market gets further clarity on 2011 guidance. The stock has declined 28% so far this year.
2.H&R Block, an expected loser in this ranking, has seen a decline in share price of 29% year-to-date. The company had a poor tax season in April that caused profits to plunge 20% in the third quarter of 2010.
Its latest results for the quarter ended April beat market expectations, but with the unemployment situation unchanged, the outlook for the company remains negative. The tax season in 2010 saw the steepest decline in number of filings with the IRS since 1971, according to the company's press release. H&R Block would not offer a detailed guidance for the full year.
3. Shares of medical devices maker Boston Scientific have been relentlessly attacked in 2010, having shed 35% of their value this year. Earlier in the year, Boston Scientific announced that it had to pull ICDs (implantable cardiac defibrillators) off the U.S. market for a month because of a regulatory misstep that cost the company more than $100 million in sales.
In April, Boston Scientific posted a wider-than-expected loss and lowered its revenue guidance for 2010 by $400 million.
4. No surprise why Diamond Offshore Drilling figures in the list. Diamond is just one among its peer group of offshore drilling stocks that was relegated to the investment "ban" list as a result of the Obama administration's ban on offshore drilling following the BP oil spill.
The offshore drilling business has become a political pawn since the spill. Last week, a US District Court judge overturned the federal ban. After Pres. Obama's legal team cried foul, Judge Martin Feldman subsequently denied a request from the Justice Department to stay his decision. Interior Secretary Ken Salazar gave some ground in Senate testimony after the court reversal of the drilling ban, saying that the government would consider a revised moratorium that could allow for the restart of drilling of wells in development, as opposed to exploration.
Until the situation in the Gulf of Mexico becomes clearer, many investors are steering clear of offshore drilling stocks as a general rule of thumb.
There have been a series of downgrades on Diamond Offshore as uncertainty related to the politics of the spill continues to ooze into the business and earnings outlook for the oil drillers. The stock has suffered a 36% drop in 2010.
5. King Pharmaceuticals, developer and marketer of branded prescription products related to neuroscience, has disappointed on many fronts. It posted a first-quarter profit below analyst targets due to declining sales of its muscle relaxant Skelaxin and other drugs.
And then there's that stock, down 37% year-to-date.
Louise Chen of Collins Stewart said the stock has suffered because of the lackluster launch of its analgesic Embeda and a panel ruling against the use of Niacin in Acurox, a pain relief drug the company jointly developed with Acura Pharmaceuticals. It also delayed the resubmission of the NDA (new drug application) filing for another drug, Remoxy.
Chen, who had a buy rating on the stock when it traded at $12.97, said that the market is pricing in the possibility that Remoxy will not be approved. "I think there is a good chance that KG gets Remoxy approved. And this has the potential to change the company. Therefore, I see it (the stock) as a free call option," wrote Chen in an email.
6. It can be argued that Anadarko Petroleum, and not BP, will turn out to be the biggest loser as a result of the BP oil spill. While BP attracts all of the headlines, Anadarko's 25% stake in the failed well has exposed the oil company to a level of liability that could be crippling to its business. And given its much smaller size in relation to BP, those liabilities could prove fatal.
In fact, on several days during the worst market selling related to the spill, Anadarko shares have suffered steeper losses than BP shares — and,for the year, Anadarko shares are down 41%.
Anadarko has responded by attempting to distance itself from BP. Anadarko CEO James Hackett recently came forward with the argument that BP's actions leading up to the oil spill exhibited "gross negligence." Such blunt words about a business partner offers some insight as to just just how high Anadarko feels the stakes are when it comes to liability. Some reports indicate that BP may sue Anadarko for trying to get out of its liabilities.
Uncertainty surrounding the ability to continue offshore drilling in the Gulf, even with the courts recently overturning the federal moratorium on drilling, is also a factor that could affect its near-term operations. Anadarko has canceled contracts with some offshore drillers in the Gulf due to the federal ban. That has stirred up another legal hornets nest as some offshore drillers look to take the company to task for its attempt to renege on lucrative oil driller day rate contract.
7. Leading agri-chemicals player Monsanto is down 40% this year.
Revenues declined 6% and profits by 45% in the third quarter ended May 2010. Sales of its iconic Roundup herbicide has suffered in the last few quarters due to an onslaught of lower priced generics that has spurred their own price cuts. An ongoing legal dispute with DuPont is also weighing on the stock.
Monsanto had some positive news recently when the Supreme Court overturned a three-year ban on planting the company's genetically modified alfalfa seeds.
Laurence Alexander of Jefferies & Co. predicts it could take Monsanto one to two years to commercialize the product and then three to four years to penetrate the market. He estimates it could add up to $0.02 to Monsanto's 2015 earnings per share. The impact of the news on the stock was muted.
In the meantime, "adverse competitive dynamics in 2010-2011 could keep the shares range-bound over the next few quarters," Alexander wrote in his June 22 report. He has a hold rating on the stock.
8.AK Steel . Steel stocks have been underperformers in 2010, thanks in large part to China's production rising to record levels. The world's biggest consumer of steel has now turned a net exporter, sparking further concerns of a glut in the market.
At the same time, iron-ore prices are also on the rise. This comes as a double whammy for producers like AK Steel, which, unlike integrated producers, does not have control over iron-ore resources.
In its first-quarter guidance, the company said that an increase in iron-ore prices greater than the 30% it had already factored in would hurt its second quarter and 2010 performance. Given the iron-ore pricing environment, the market has been favoring integrated players such as U.S. Steel ahead of AK Steel. The stock has sunk by 43% year-to-date.
9. Chipmaker Nvidia has tanked 44% this year. A slower than expected ramp up of Fermi, its next-generation chip architecture, and Tegra, an application processor designed for mobile handsets, has been a drag on the stock.
Rajvindra Gill of Needham & Company, who downgraded the stock from a strong buy to a hold in April, said that 2010 would be a challenging year for Nvidia's chipset business, which accounts for a quarter of its business. "The chipset business is in a secular decline. It needs to be offset with new products, but those are not ramping up fast enough," said Gill.
Management lowered revenue guidance for the July quarter, even as it continues to trumpet its new product launches and build inventory. That raises a red flag, according to the analyst.
Gill believes the company could lose more market share to AMD and to Intel's integrated graphics. But he concedes that many of the concerns are already factored into the current market price. He has a hold rating on the stock.
10. Dairy and soy-milk products maker Dean Foods has been the worst performer year-to-date.
The stock has declined 44% in 2010, effectively mirroring the company's performance during the first quarter, when profits fell 43% and the company missed analysts' expectations by nearly 18%.
Margin pressures have only mounted as the year has progressed, as retailers slash the prices of private labels to cater to price-sensitive customers, hurting earnings growth of the company's regional branded milk business in the process. In its earnings conference call, management said it was difficult to forecast how long the retail wars will last, but added that continuing pricing pressures could impact the company's operating profit by up to $100 million. Additionally, management indicated that rising dairy commodity prices would add to margin pressures.
The message from the milk producer: things could remain fluid for a while. The stock trades slightly below its median price target of $11.
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Disclosures:
Disclosure information was not available for Venkataraman or his company.