Seeking out great stocks to buy is essential, beyond a doubt. But to get the absolute best possible performance out of your portfolio, you’ve got to be prepared to trim back the deadwood.
Being on the wrong side of a moving stock can eat away at those all-important long-term returns, so it’s important to keep your eyes out for potential losing stocks along with the winners. Even the best gardens need pruning, and our team has spotted a couple of stocks that seem like prime candidates for selling or avoiding.
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United Airlines (UAL) was a weaker airline than the other major U.S. airlines before the pandemic. In 2019 the company recorded $43.26 billion in revenues but only managed around $3 billion in net income. In contrast, Delta recorded $47 billion in revenues and $4.77 billion in net income for the same time period, meaning they squeezed 58.9% more income out of revenues that were less than 9% greater.
At the onset of the pandemic, most investors anticipated that there would be winners and losers among the four major U.S. airlines. The early narrative that Southwest and Delta would see a quicker rebound and suffer less than American and United has formulated into reality.
UAL released Q2 earnings on July 20th. The bright spot was a reported net loss of $400 million, a vast improvement from their $7 billion loss for 2020.
United reported that capacity was 46% lower in Q2 2021 than Q2 2019 and gave guidance that it expects capacity in Q3 to be 26% lower than in Q3 2019. According to the company’s expectations, it should achieve profitability in Q3 and beyond, but they clarify that the profitability, in this case, is defined by positive adjusted pre-tax income.
United remains a weak player among the major U.S. airlines. Further, it’s clear that the company has a long way to go until investors genuinely understand the pandemic ramifications.
The pandemic has proven to be a blessing for e-commerce platforms across the board. One area that has done exceptionally well is the online used car market. While pandemic shutdowns eliminated many of its brick-and-mortar used car peers, Caravana (CVNA) thrived.
Since March 2020, CVNA share price has bolted upward 12x. So far in 2021, Carvana has shot up another 50%, approximately tripling the performance of the S&P 500.
Still, Carvana isn’t substantially profitable, and the company’s recent $750 million debt issuance highlights its cash-bleeding nature. Not to mention that the stock is downright expensive right now. CVNA’s current share price reflects a market cap of more than $60 billion. This puts Carvana at a higher value than Ford (F) on a market cap basis. If this year’s outperformance trend holds, it’s catching up to GM’s $74 billion market cap quickly.
When you consider the company’s enterprise value (that is, the company’s market capitalization plus all its net cash or debt position), Carvana is roughly 5x more expensive than its closest rival, Vroom (VRM), which is smaller and growing at a slower pace, but that valuation seems unrealistic.
While we do see a promising future for the industry, we’ll let Carvana cool off for a while before considering it in the buying range.
Before the pandemic, in 2020, Carnival Corp (CCL) had an enterprise value of $40 billion. Over the past year, the company lost $9 billion, resulting in dilution of CCL stock. Plus, the company has racked up substantial debt during that period.
CCL’s share price has sold off $32 to $22 in recent weeks, but it’s still nowhere near what we would consider buying range. The current $24.91 billion market cap for CCL puts the enterprise value at $48 billion. This basically means investors believe Carnival is worth roughly $8 billion more than it was before anyone had heard of Covid-19.
Last year’s massive losses didn’t take CCL down, but it doesn’t make sense to think that it’s worth more today than it was before the pandemic. Considering the looming delta variant threat, it may be a while before Carnival is firing on all cylinders again.
Should you invest in Carnival Corp right now?
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