Don’t Buy These Stocks

Seeking out great stocks to buy is essential, beyond a doubt.  But knowing which stocks to sell or avoid is also important.  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.  Our team has spotted a few stocks that should be avoided like the plague right now.

Verizon’s (VZ) average analyst price target has decreased by around 60 cents in the past six months.  It’s also concerning that VZ’s average broker recommendation has decreased by 0.28 in the past eighteen months and is currently just 2.7 (Hold); 19 analysts consider the stock a Hold, only 7 consider it a Buy, and 2 consider VZ a Sell.

The problem with VZ isn’t the lack of demand for their internet and cable service. It’s accessibility.  Millions of consumers are willing to pay for VZ’s services but simply do not have access.  

VZ may seem to have an attractive beta for those seeking growth with low risk, but now is not the time to buy VZ.  The stock’s price returns are disappointing, to say the least.   

Verizon stock is down nearly 6% YTD versus a 22.5% rise in the S&P 500 during the same period.  

Offshore oil rig service provider Transocean (RIG) suffered severely in the wake of 2020’s economic shutdown and travel bans (when crude prices plummeted to all-time lows), but the company was in bad shape long before that.  In 2019 before the pandemic, Transocean reported an EPS loss of $1.45.  Bank of America analyst Mike Sabella projects that losses will continue through at least 2023.

He’s projecting Transocean will finish 2021 with about $450 million in liquidity, and the company will generate negative $50 million in 2022 free cash flow.  At the same time, Transocean has more than $8 billion in debt and $600 million in 2022 debt maturities.  Bank of America has an Underperform rating and a $1 price target for Transocean.

The current consensus among the 14 analysts offering recommendations is to Hold RIG.  The stock has 9 Hold ratings, 5 Sell ratings, and no Buy ratings.  A median target of $2.50 represents a 33% decrease from the most recent price.  

For the third quarter of 2021, this offshore drilling contractor expects adjusted contract drilling revenues of $670 million, indicating growth from the sequentially reported figure of $656 million.  It expects third-quarter operations and maintenance expenses of $427 million.  Its G&A costs are expected to be $40 million, while capital expenditure, including capitalized interest, is estimated to be $90 million.

Chinese tech stocks remain under intense pressure thanks to the government clampdown.  The Chinese government has taken regulatory action against gaming, streaming media, e-commerce, and tobacco firms, among various others.

The crackdown on gaming has extended to younger players, with new rules for the under-18 population allowing only an hour a day, between 8 and 9 pm,  and only on Friday, Saturday, and Sunday, for a total of three hours per week. There are roughly 665 million gamers in China. While a recent Statista report suggests, about 23% of them are under age 18.

 NetEase (NTES) generated 71% of its revenue from games last quarter, while its online education subsidiary Youdao (DAO), exposed to the crackdown on education platforms, generated 7% of its revenue.

The restrictions could further erode investors’ confidence in Chinese tech stocks.  As a result, NetEase will likely remain under pressure — and look cheap — until the regulatory headwinds subside.  It could take several years for that to happen, so we’ll steer clear of NTES for now.  

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