The free market is truly like a jungle. In the jungle, once-mighty animals become old and frail, and they fall prey to younger, stronger beasts. The same thing happens with companies. Once-great investments become laggards if they fail to evolve fast enough.
Some companies are able to adapt and survive. Apple (Nasdaq: APPL) is a great example. The computer maker morphed into a tablet and smartphone provider with no equal. Had Apple stuck with the old products and way of doing business, the company would simply be a footnote in tech history.
Other companies have not been so fortunate and have become irrelevant or gone extinct. One of the keys to successful investing is knowing how to spot the companies that are no longer dominant and cull these weak names from your portfolio.
Here are three stocks exhibiting signs that it's time to sell...
1. The New York Times Co. (NYSE: NYT)
This once-dominant newspaper publishing powerhouse has been rapidly losing market share. The unbelievably fast expansion of online news services and instant access to information is quickly rendering printed newspapers a thing of the past. The Times is working hard on its digital efforts, but it appears to be too little, too late. Google news, the Huffington Post, MSN, Yahoo and many others already have a huge lead in the digital news space.
Looking at the numbers, a decade ago, The New York Times Co. had revenues of just over $3 billion on which they made $300 million. In 2011, the company lost $40 million on revenues of $2.3 billion. A downtrend in display and classified ad sales are to blame for this decrease. Despite some progress being made in digital sales, the company is fading fast. It simply does not have the capital base to build a profitable presence in the digital age.
2. Sprint Nextel (NYSE: S)
This once-contending player in the wireless arena has been surpassed by its competitors, and it will likely never be able to compete with the big dogs like AT&T (NYSE: T) and Verizon Communications (NYSE: VZ).
Sprint made a fatal flaw in 2004 that it will likely never recover from completely: the $35 billion buyout of Nextel. Not only were the customer bases of the two companies incompatible, the different platforms created a near disaster for Sprint. Unable to manage the vast differences between the merged companies, Sprint watched as it customers left in droves.
Sprint's competitors, on the other hand, have grown quickly since 2004. Verizon now has 104 million subscribers and AT&T has 95 million, while Sprint is languishing far behind with just 50 million. And Sprint's revenue has decreased from $41.1 billion in 2007 to $33.7 billion in 2011. Sprint has no edge over the competition and will continue to struggle.
3. Barnes & Noble (NYSE: BKS)
This once-mighty retail book chain has fallen victim to the Internet, as Amazon.com (Nasdaq: AMZN) has come to dominate book sales. In 2011, Barnes & Noble lost $69 million on just over $7 billion in revenue. Amazon, on the other hand, earned over $630 million on revenue of $48.1 billion.
Amazon's recent revenue increases are mostly due to the Kindle. Barnes & Noble has tried unsuccessfully to compete in this space with its Nook e-book reader. Although Barnes & Noble has impressive retail sales of $4.86 billion in its last fiscal year, the Nook segment only accounted for $933 million of that revenue. The Nook has just 27% of the U.S. market share, whereas Amazon's Kindle has 60%, and Apple is a distant third with 10%.
Things are quickly moving digital, and it's expensive to maintain a chain of bookstores. In fact, in its SEC filing, Barnes & Noble lists "the maturity of the market for traditional retail stores" as a risk factor for the company. Could it be any clearer that Barnes & Noble's glory days are over and it's time to sell?
Risks to Consider: Anything can happen in the stock market. One of these companies could discover a new way of doing things and turn itself around. Therefore, the risk lays in missing out on potential by selling these names. However, based on the available information, I truly think selling these stocks is the right move.
Action To Take --> If you own these three stocks, it's time to sell and seek to redeploy the funds in stocks with more upside potential.