Three Stocks to Avoid for the Week of May 2nd

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. 

Surging house prices have made buying a home significantly less affordable. At the same time, the Federal Reserve has signaled its intention to raise interest rates to counteract inflation. That’s driven mortgage rates above 5% — the highest they’ve been in more than a decade.  These trends are beginning to weigh on demand for real estate services which could exacerbate Redfin’s (RDFN) pre-existing profitability issues.

Competition on home offers written by Redfin agents is on the decline for the first time since September.  March’s bidding war rate was 69.3%, down from 71.9% in February.  The drop in homebuyer competition is just one sign that the housing market is beginning to slow down.  Online housing searches and home tours are also declining, and more sellers are lowering their asking price.

“Most homebuyers are still encountering bidding wars, but competition is beginning to cool because surging mortgage rates and home prices are prompting some Americans to back out or put their buying plans on hold,” said Redfin Chief Economist Daryl Fairweather. “We expect bidding wars to ease further in the coming months as rising mortgage rates price more buyers out of the market.”

If housing sales slow, Redfin could struggle to integrate its recent acquisitions such as mortgage lender Bay Equity Home Loans, which could stunt the company’s growth and add to its profitability issues. The current consensus recommendation is to Hold RDFN.  We’ll steer clear until conditions improve.

Food delivery leader and pandemic darling DoorDash (DASH) was one of the big winners in the shift to stay-at-home culture.  Between 2019 and 2021 DASH revenue increased by 451% from $885 million to $4.88 billion.  But now that the economic reopening is complete, DoorDash’s revenue increases are grinding to a halt.  Between the third and fourth quarters of 2021, it experienced growth of just 1.9%.

DASH’s revenue came in at $1.30 billion for the fourth quarter 2021, up 34% year-over-year.  However, its total costs and expenses were up 14% year-over-year at $1.45 billion.  Total current liabilities were $1.76 billion for 2021, compared to $1.4 billion for 2020.

The company is expecting $48 to $50 billion in gross order volume in 2022, implying a modest 14% increase from $41.9 billion last year.  However, that’s not enough to justify DASH’s lofty valuation.  Currently the stock trades at a price-to-sales multiple of 7.4, expensive when compared to top competitors like Uber Technologies (UBER) which trades at a price-to-sales multiple of 3.6 – half that of DASH.  

DASH’s EPS is estimated to remain negative in 2022 and 2023. Its EPS is estimated to fall 20.6% for the first quarter.  It’s Important to note that the company missed EPS estimates in each of the trailing four quarters. The stock has declined 44% since the beginning of the year to close Friday’s session at $81.43.

New York based LivePerson, Inc. (LPSN) is best known as the developer of the Conversational Cloud, a software platform that allows consumers to message with brands.  The company tops our list this week after Q4 financial results that point to a substantial slowdown in organic revenue growth that is unlikely to meaningfully improve until fiscal 2023.

Management signaled a shift in the growth strategy ahead to focus more on generating earnings in 2022 rather than gaining enterprise customers.  The slower growth profile, powered by a steady return toward more normal in-person working trends, could translate into weaker earnings than Wall Street is hoping for.

To that end, the company predicted that sales in the first quarter of about $125 million, translating into a 16% boost.  Revenue for the full year will climb by less than 20% to about $560 million where most Wall Street pros were looking for that 2022 sales figure to be closer to $600 million.  

LivePerson was downgraded by no less than nine firms after the disappointing call.  Among the analysts to revise their ratings was Evercore ISI analyst Peter Levine who downgraded LPSN to In Line from Outperform and slashed the price target to $20, down from $75 following the company’s “sub-par results and a weak outlook.”