While the S&P 500 has its best first quarter start in 14 years in 2012, it wasn't pleasant for all stocks. While most investors enjoyed the fruits that a 12% Q1 market advance provided, it was rotten apples for a couple of names.
The worst-performing stock in the S&P 500 during the Q1 was supermarket operator SuperValu (NYSE:SVU). During the Q1, SVU shares tanked by 30%. It's not difficult to see why. Grocery retailing is a very tough business, characterized by razor-thin margins and very low returns on capital. In SuperValu's case, the company is additionally maimed by its capital structure. It has a market cap of just over $1 billion and net debt of over $6.7 billion. Thanks to increasing competition from names like Publix and Kroger (NYSE:KR), SuperValu has struggled for years. Sales have declined for the past three years, and the losses have piled up. Factor in the heavy debt burden, and it's no surprise the stock was the worst-performing S&P stock so far in 2012.
What gives this name more than a flicker of hope is that SVU generates over $35 billion in annual sales a year, which is really the only reason it can still survive with the debt load it carries. The slightest improvement in profit margin has a tremendous impact on earnings growth. Yet SVU hasn't been able to improve margins and is losing sales to the competition. As long as that condition persists, the stock could continue to perform poorly. See Analyze Investments Quickly With Ratios.
Education company Apollo Group (Nasdaq:APOL) was the next worst-performing stock, down nearly 30% in the Q1. Apollo, the largest provider of for-profit college education in the U.S., is in a terrible spot, along with others like Career Education (Nasdaq:CECO) and Corinthian Colleges (Nasdaq:COCO), due to concerns that these schools were enrolling unqualified students to receive federal funding. The accusations stem from graduates who claim they graduate with massive debt loads and no skills to find adequate jobs. The U.S. Department of Education has become involved, and the net result is that enrollment growth is shrinking. Until this situation is resolved, the significant growth that names like Apollo once generated is history. While shares in many of these education providers look statistically cheap, the future growth potential is murky at best. See Life Lesson No. 1: Avoid College Scholarship Fraud.
The worst-performing stocks in 2011, namely financials and housing, turned out to be the best performers so far in 2012. For contrarian investors, looking at these worst-performing stocks can sometimes create an opportunity to buy something unloved at an undervalued price. Just the same, some companies can suffer from issues that are more than temporary and best left avoided at all costs.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.