2016 Predictions: Retailers/REITs Good, Stay Away From Biotechs And Chipotle

This continues the 2016 predictions series. Here are some individual stock and sector takes.

Chipotle Will Have A Rough 2016

Chipotle shares sold off sharply toward the end of 2015 as the company was faced by an increasingly widespread E.coli scandal. The company has faced mounting concerns as new cases of the E.coli continued to show themselves in different states.

Shares had initially made several strong bounces off the key $500 per share level as investors sought to pile into a strong long-term growth story temporarily on sale. But now the temporary nature of the problem is coming into question.

Going into Christmas, there were yet more E.coli cases in new states. Surveys found between a third and half of Chipotle’s former customers have entirely stopped eating at the company’s stores until the crisis ends, if not longer.

Chipotle still sells at 28x earnings, which is way too much. You’re looking at sales likely down 20%, if not more, in the early half of 2016. To put it simply, full year earnings will assuredly be down.

That won’t support a company trading at such a high earnings ratio. This stock is going down this year.

Biotech: More Problems

Biotech shares had a strong run between 2011 and 2015. But after the summer of 2015, biotech shares started to sink ominously.

The trouble started with a seemingly small event. Martin Shkreli, a now discredited and subsequently arrested ex-biotech CEO, attempted to raise the price of an old drug by 5000%. This was immediately denounced by Hillary Clinton, who has now turned her negative views on the private drug and health care industries into a crusade following the incident.

Making matters worse, a scandal enveloped former biotech superstar company Valeant shortly thereafter. Valeant appeared to be using phantom pharmacies to stick aggressive price increases to Medicare and private insurers. Valeant shares collapsed in the wake of it.

Speculators have started to fear that the negative political climate, combined with a bumper crop of biotech trial failures has ruined the formerly festive mood in the sector. Biotech is likely to experience more losses in 2016. The top is in and the tide has turned.

Retail: 2016 Will Be The Turnaround Year

2015 was the year of Amazon. The online year’s shares more than doubled, making it into the US’ 6th most valuable company by the end of the year. It was a year of moving from triumph to triumph for Bezo’s empire.

On the flipside, everyone has seemingly decided that malls and brick and mortar stores are dead. This simply won’t be the case; people like shopping at Dollar General. The media is overblowing an albeit strong trend toward online shopping.

We’re not a nation of shut-ins, waiting for the bell to ring from the UPS guy. We like going out, meeting other people, shopping, and touching smelling and seeing sights. Some stores, like electronics, are in grave danger, but the broader industry is down enough.

Companies like Wal-Mart, along with much of retail, will find a more receptive market in 2016. Other names to watch include Macy’s, Nordstrom’s, and perhaps even Aeropostale. As for Amazon, 2016 may be up again, but it certainly won’t double.

REITs: A Good Bet For Yield Seekers This Year

2015 was a terrible year for investors chasing high yield companies. There was a meltdown across the entire spectrum, with a whole range of companies diving. Business development corps (BDCs), Real Estate Utility Trusts (REITs), utilities, Master Limited Partnerships (MLPs), anything promised to be defensive with a high yield just collapsed.

Kinder Morgan, with its 70% drop and the axing of the dividend, highlighted the tempestuous year. But we may be approaching a baby with the bathwater moment.

Many of the high yield shares have gotten really hammered, well out of line with what you’d expect. The Fed has hiked by a paltry 0.25%, but investors are treating this as if it will lead to an apocalypse in the yield arena.

If you agree with the idea that the Fed will only hire once or at most twice this cycle, interest rates aren’t going to derail companies like REITs.

With the commercial sector strong, and other pockets of REITdom such as storage an residential apartments also going well, there’s no reason to blindly sell off the sector. With many REITs now yielding in the 6 to 8% range, there’s plenty of value to be had. 2016 should show a strong bounce for many of the more embattled names.

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