Investor psychology and sentiment is important. And investor sentiment over the last week has taken a turn for the worse. The S&P/TSX Composite Index (TSX: OSPTX) fell 1.5% yesterday, to close at 14,893.57, a new three-month low. And losses seem to be accelerating, as the index has fallen 4.52% in the last month. In this kind of a market, where investor sentiment has turned decidedly negative, or at least more fearful, investors need to steer clear of those stocks that require positive sentiment and extra optimism.
BlackBerry Ltd.
BlackBerry Ltd. (TSX: BB)(NASDAQ: BBRY) will be reporting its second-quarter fiscal 2015 results today, and expectations are for the company to report a loss of $0.16 per share. While the loss is significantly lower than the $0.47 per share loss in the same quarter last year, the company’s transformation is still in early stages.
BlackBerry is still on shaky grounds. While cash burn is no longer as big an issue for the company, as the latest quarter saw operating cash flow cover capital expenditures, there is still a big concern as to how the company will grow revenue going forward. The company is still fighting declining sales and searching for a viable, ongoing business model. And this is exactly what CEO John Chen is attempting to pull off.
The introduction of its new smartphone, the “Passport”, is the company’s latest attempt to recapture at least some of its market of smartphone users. It is not trying to compete with the iPhone, but is trying to engage corporate users again. The stock is therefore still a speculative one. The cash balance at the end of the first quarter of 2014 stands at $2.7 billion, which is a much needed cushion if this turnaround has a chance of taking hold.
So while I hate to say it, because I do think that BlackBerry’s new strategy is definitely interesting, I think this stock is one to avoid especially if market sentiment remains weak.
Bombardier Inc.
In recent years, Bombardier Inc. (TSX: BBD.B) has struggled with declining revenues and declining margins, and ongoing delays in its CSeries program that has left its stock price in limbo. Recently the CSeries was grounded again for three months following engine failure, but it has since began test flights again. There is concern that the expectation of first delivery being made in the latter part of 2015 will not come to fruition, and will be pushed into 2016 instead. As costs continue to escalate, projected development costs are now at $4.4 billion, $1 billion greater than the projection last year.
Bombardier is targeting revenue for the CSeries of between US$5 billion to US$8 billion, which does not seem to be supported by the number of firm orders for the plane, currently at 203. The company is targeting to have 300 firm orders by the time the plane enters into service, but competition is intense so this has come into question.
As always, Bombardier will face stiff competition from its closest competitor, Embraer (NYSE: ERJ). Embraer’s new E2 family of jets, particularly the E195 will be the biggest competition for Bombardier’s CSeries. In addition, Airbus and Boeing are both very active in this market, and Airbus’ A319 Neo, a direct competitor to Bombardier’s CSeries, is scheduled to arrive in the market as early as 2016.
In my view, too much uncertainty with regard to costs and reliability of the CSeries jets, and ultimately the profitability of the capital intensive CSeries program, will continue to be too much for investors to stomach.
There is enough risk, perceived and otherwise, in the market at this time. Investor sentiment being i more and more negative, the companies that have less company-specific uncertainty will outperform. We would therefore be wise to avoid stocks with high levels of company-specific risk such as the ones discussed in this articles.
