Three Stocks to Avoid for the Week of April 25th

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. 

The railroad industry is facing a number of challenges that threaten operating ratios across the entire sector including a labor shortage, capacity constraints and service issues.  On Wednesday the Association of American Railroads (AAR) reported an astounding 8.1% year-over-year decline in weekly rail traffic.  These hefty cost headwinds will likely weigh heavily on Canadian Pacific Railway (CP) ahead of its Q1 earnings call and delay visions of recovery in the second half of the year.  

Analysts are not overly optimistic about Canadian Pacific’s earnings call slated for Tuesday.  The 18 analysts offering a first quarter forecast for CP see a 4% year-over-year decline in revenue and expect 0.57 per share in earnings, representing a 20% YOY decline.  

Several analysts have slashed their target for CP in recent weeks on execution concerns against a difficult macroeconomic backdrop moving into the second half of the year including Raymond James’ Steve Hansen.  “We are trimming our target prices on Canadian Pacific Railway to account for a weaker-than-expected start to the year and incremental concerns over the slowing economic backdrop,” the analyst wrote in a note to clients. 

CP’s share price is down 8% over the past month, the downward momentum is likely to continue until headwinds abate.  

With Roku price nearly 80% off of its July ATH, eager investors may see a buying opportunity here.  Considering the obstacles that the not-yet-profitable company is up against, we beg to differ. 

The supply chain disruptions that hampered growth in the U.S. television market in 2021 will likely persist well into 2022.  “Overall TV unit sales are likely to remain below pre-Covid levels, which could affect our active account growth,” Anthony Wood, Roku’s founder and CEO wrote in the company’s letter to shareholders. “On the monetization side, delayed ad spend in verticals most impacted by supply/demand imbalances may continue into 2022.”

Roku ended the third quarter with 56.4 million active user accounts, up 1.3 million from the prior quarter.  However, analysts had expected 1.68 million new user accounts.

For the first quarter, Roku said it sees revenue of $720 million, which implies 25% growth. Analysts were projecting revenue of $748.5 million for the period.  Pivotal Research was one of several firms to decrease its rating on Roku recently.  Analyst Jeffrey Wlodarczak downgraded the stock from Hold to Sell and slashed its price target to $95 from $350. 

“The bottom line is with increasing competition, a potential significantly weakening global economy, a market that is NOT rewarding non-profitable tech names with long pathways to profitability and our new target price we are reducing our rating on ROKU from HOLD to SELL,” the analyst wrote in a note to clients.

Rising interest rates and a cooling off of the red-hot housing market creates a challenging backdrop for mortgage provider Rocket Companies (RKT).   Mortgage interest rates have increased about 90 basis points year-to-date and the average rate for a 30-year mortgage is currently 4.19% versus an average of 3.09% in 2021.  This is likely to drive origination volumes lower and could also lead to elevated competition as mortgage originators compete in a smaller market. 

Rocket has struggled to meet expectations for the past few quarters as it laps 2021’s blockbuster numbers.  Most recently the company came out with quarterly earnings of $0.32 per share, missing the consensus estimate of $0.38 per share.  This compares to earnings of $1.14 per share a year ago.  Revenue was reported as $2.59B, missing consensus expectations of $2.62B.

Rocket’s been underperforming the broader market so far in 2022. RKT shares have lost about 41% since the beginning of the year versus the S&P 500’s decline of 11%.  The pros on Wall Street say to Hold RKT.  Of 15 analysts offering recommendations, 3 rate the stock a Buy, 10 rate it a Hold and 2 say to Sell the shares.