Seeking out great stocks to buy is essential, but many would say it’s even more important to know which stocks to steer clear of. A losing stock can eat away at your precious long-term returns. So, figuring out which stocks to trim or get rid of is essential for proper portfolio maintenance.
Even the best gardens need pruning and our team has spotted a few stocks that seem like prime candidates for selling or avoiding. Continue reading to find out which three stocks our team is staying away from this week.
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Peloton (PTON) is first up on the list this week due to its disappointing earnings and significantly reduced outlook for fiscal 2022.
Stay at home culture lifted PTON to great heights throughout 2020, surging above $160 during the holiday season last year. Sadly, the past year has not been kind to Peloton as reopening headwinds seem to have been too much for the company to handle. The company’s failure to execute amid growing competition in the space has dragged share price down more than 60% this year.
A large part of that loss came after the company reported a steep revenue miss during its recent earnings call. The consensus was looking for $1.51 billion in revenue for the first quarter and $5.4 billion for fiscal 2021. The reported figures fell short, further disappointing investors. Peloton reported $1.1 – $1.2 billion in revenue for the first quarter and $4.4 – $4.8 billion for FY21. The company attributed their lackluster performance to a greater than expected tapering in retail visits and website traffic.
To make matters worse, Peloton’s outlook for FY22 was less than rosy. The company said that the supply chain crisis and higher freight costs led them to lower guidance for the year. The company further stated that its team has never seen a more complex operating environment in which to guide or expect results. Hardware margins are seeing compression from supply chain and logistics issues limiting visibility into future performance. The company lowered FY22 revenue guidance that was initially provided last quarter by $800 million.
Peloton has been downgraded at several firms and its price target slashed. Stifel analyst Scott Devitt downgraded Peloton to Hold from Buy with a price target of $70, down from $120. The analyst says the company’s fiscal year outlook has seen “rapid deterioration.”
PTON share price has bled 48% over the past month, which could pique the interest of bargain hunters. We’ll stick to the sidelines until there is evidence to validate the already pricey valuation.
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SaaS customer service platform developer Zendesk (ZEN) is next up on our list after announcing plans to buy Momentive (MNTV), a customer experience solutions provider. ZEN would acquire MNTV at a cost of $4 billion in stock, which equates to almost one third of Zendesk’s market cap.
The pros on Wall Street were not pleased by the acquisition that Zendesk said will be “growth accretive” by 2023. Analysts slashed their ratings and price targets on Zendesk because of the hefty dilution and the risk of spending so much on a business that’s growing more slowly than the acquirer. Zendesk’s revenue is on pace to grow almost 30% this year, while Momentive is expected to grow by just under 20%.
Piper Sandler analyst Brent Bracelin downgraded ZEN to Neutral from Overweight, lowering his price target to $122 from $175. The analyst sees near-term integration risks and potential shareholder dilution with Momentive shareholders poised to take a 22% ownership stake in the combined Zendesk business post the deal close. He’s comfortable moving to the sidelines pending better visibility into the combined growth trajectory of the combined business models.
Zendesk was already lagging its peers prior to the announced acquisition. Since the announcement the stock bled another 18% to close Friday 30% lower for the year.
Last up on our list of stocks to avoid is Big Lots (BIG). Challenges that the company is facing include supply chain bottlenecks, increasing freight expenses, labor challenges and competition in food-/consumables.
The stock has been the recipient of numerous downgrades recently including one from Piper Sandler analyst Peter Keith. The analyst downgraded Big Lots to Neutral from Overweight, saying in a note to clients that the economic environment was turning sour for the retailer.
“We see a trifecta of macro headwinds impacting fundamentals through the first half of 2022,” Keith wrote.
“These include the end of two years of stimulus check tailwinds in next year’s first half; ocean freight rates continue to intensify to all-time highs, and are likely a gross-margin drag through the first half of 2022; and retail industry wage pressure seems unlikely to materially abate any time soon,” he added.
The stock has been on a major descent, dropping almost 30% over the past six months. Piper Sandler lowered its price target on the stock to $50 per share from $60. That’s 7% above where shares of Big Lots closed on Friday.
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