Tuesday, 28 March 2023

Proceed With Caution When Considering These 5 Ultra-Popular Stocks

by Earn Media

It’s been a rough time in the stock market over the past year and even good companies with lots of long-term potential experienced massive share price sell-offs right alongside not-so-great companies.

That makes finding good stocks to buy and hold over the long term that much more difficult. So to help sort out some of the proverbial wheat from the chaff, here are five popular stocks that many investors should be cautious about right now: Carvana (NYSE: CVNA), Redfin (NASDAQ: RDFN), Canoo (NASDAQ: GOEV), Stitch Fix (NASDAQ: SFIX), and Affirm Holdings (NASDAQ: AFRM).

Proceed With Caution When Considering These 5 Ultra-Popular Stocks

Image source: Getty Images.

1. Carvana

You wouldn’t know Carvana’s business is stuck grinding its gears by looking at the company’s 72% year-to-date share price rise. But a quick peek under the hood will give investors all they need to know about this online car-buying company.

The company has more than $9 billion in debt at a time when it isn’t performing well. Car demand has stalled amid high interest rates, and Carvana’s management is expecting a loss of between $50 million and $100 million in its upcoming first quarter.

Carvana’s stock recently received a boost when the company announced the restructuring of some of its debt. But retail sales are expected to fall 26% year over year in the first quarter to about 77,500 units, and operating revenue is looking to slide 28% to $2.5 billion. All of this means that Carvana is far from out of the woods, and investors would be wise to wait and see it fully emerge before betting on this beleaguered company.

2. Redfin

There are a couple of reasons some investors are bullish on Redfin right now, and they may not be entirely wrong. For one, the company exited its ill-fated iBuying business late last year. Second, the Federal Reserve recently indicated that it will only raise interest rates one more time this year.

But here’s why investors should still be cautious with Redfin. The company’s outlook for the first quarter could be defined as dismal. Management estimates that sales will decline by up to 49% to $307 million and losses will widen to between $105 million to $106 million, worse than the loss of $91 million in the first quarter of 2022.

Making matters worse for Redfin is the potential for a recession to slow down the housing market even further. The recent bank failures encouraged the Fed to raise interest rates by just 25 basis points, but there are still lingering questions about the economy. Inflation is still high, interest rates are elevated, and more than 100,000 tech workers in the U.S. have already lost their jobs in just the first three months of this year.

Maybe a housing market bounce-back is around the corner, but I’m skeptical. Add to all of this the fact that some banks may be less eager to lend money in the wake of recent bank failures, and I’d argue that betting on Redfin’s mortgage lending business right now may not be the wisest choice.

3. Canoo

The fast-growing electric-vehicle market has no doubt spurred a lot of interest among investors looking for a way to benefit from this emerging industry. But while a lot of new companies have entered the EV game recently, not all of them are playing with the same deck of cards.

Canoo went public at the very end of 2020 and rode the last wave of enthusiasm for high-growth stocks before the market wiped out. Some investors are hoping Canoo’s niche EVs could eventually turn things around and reverse the 89% drop in the stock.

The problem is that Canoo has been slow to actually make its EVs, despite having an order of up to 10,000 vehicles from Walmart and an additional orders from other companies. And despite being public for more than two years, Canoo doesn’t generate any revenue right now.

The company recently said it was raising about $52 million by issuing new shares for institutional investors, but the price of the shares it sold was at $1.05. As of this writing, a Canoo share is worth about half that.

EVs may have a bright future, but Canoo’s current financial problems and lack of vehicle production indicate that the company may not be following the same path as its peers.

4. Stitch Fix

“Stitch” and “fix” are two fitting adjectives for describing what this company needs to do to improve its financial situation. Revenue fell 20% in the most recent quarter to $412 million, marking yet another quarter of declining sales for the company.

Stitch Fix is also facing a customer exodus. The company had 3.5 million active clients in the second quarter, an 11% decline from the year-ago quarter and virtually matching the number of active clients the company had in 2020. Not exactly what you want from a growth company.

Investors recently championed the announcement that Stitch Fix is replacing its CEO — the third time it’s done so in as many years. That’s hardly a good sign, even if investors were happy about the news.

Perhaps a new CEO, which hasn’t yet been found, can patch up the holes in Stitch Fix’s business. But investors should probably sit this one out while the mending is being done.

5. Affirm Holdings

The buy now, pay later (BNPL) market got a lot of attention over the past couple of years and Affirm benefited from the industry’s growth. But that was the days of near-zero interest rates and the government’s practice of handing out cash to help people through the height of the pandemic. The days of easy money are long gone as the Federal Reserve made aggressive interest rate increases to curb sky-high inflation.

Those high rates affected lending and loans, making Affirm’s business more expensive. In the second quarter, the company’s gross merchandise volume increased 27% from the year-ago quarter to $5.7 billion. But despite the increase, Affirm’s sales rose just 11% year over year to $400 million.

Even more concerning is that the company’s operating loss widened to $360 million in the quarter, worse than the loss of $196 million in the year-ago quarter. That’s a troubling trend especially as interest rates rise and the U.S. could be headed for a recession. Higher rates caused Affirm to increase its own interest rates for customers and raise prices for merchants, which could put more pressure on Affirm’s ability to grow its business.

If a recession comes, Affirm could see its loan delinquencies rise. While that’s a hypothetical right now, the company is already struggling financially, and any more pressure on its business from a shifting macroeconomic environment could make it harder for Affirm to reach profitability.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Affirm, Redfin, and Stitch Fix. The Motley Fool recommends the following options: short May 2023 $16 calls on Redfin. The Motley Fool has a disclosure policy.

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