Three Stocks to Avoid for the Week of June 20th

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. 

Medical technology company Medtronic Inc. (MDT) tops our list of stocks to avoid following a rough finish to a fiscal year wrought with turmoil.  The company was already struggling to recover from medical device recalls and an FDA warning when China enforced Covid-related lockdowns.  During its fiscal fourth quarter of 2022, revenue from China, which accounts for over 40% of the company’s emerging markets revenue, declined 10%.

Medtronic missed on both the top and bottom lines for Q4.  Revenue came in at $8.09 billion which was 4% below expectations for $8.43 billion.  Earnings per share came in at $1.52 which was about 2% off expectations of $1.56.

The medical device maker has also been facing higher raw material, labor and transportation costs, stemming from inflationary and supply-chain challenges.  Against this backdrop, the company cautiously lowered its guidance for its financial year 2023.  Management now expects adjusted earnings for financial year 2023 of US$5.53 per share to US$5.65 per share, below analysts’ estimates of US$5.82 per share.  “Supply chain, inflation, and foreign exchange are expected to create near-term pressure,” commented Medtronic chief financial officer Karen Parkhill.

MDT share price has plunged nearly 16% since the May 26th call.  Many of the obstacles that sprung up over the past year remain unresolved, for the industry and for Medtronic.  We’re avoiding this stock until concerns abate. 

Headwinds against e-commerce car vendor Carvana (CVNA) had already been intensifying before the sizable ramp up to its vehicle inventory in the first-quarter.  Management recently admitted that it accelerated its car buying business at the wrong time, during a worsening economic environment, causing investors to flee the stock in search of greener pastures.  CVNA could continue to burn through cash at an alarming rate as it faces threats to the value of its inventory.  

“It has become clear over the past few months that the company is facing serious challenges to the business,” Morgan Stanley analyst Adam Jonas wrote in a note to clients after he downgraded CVNA to Equal Weight from Overweight and slashed the price target by 70% to $105, down from $360. “By the company’s own admission, it had accelerated growth at precisely the wrong time into a consumer slowdown leaving a major mismatch between capacity and demand, creating a liquidity crunch,” he continued.

The company’s liquidity issues are likely to be compounded as the Fed boosts benchmark interest rates, making it more expensive to take out loans.  With its business model, Carvana is also at risk of a decline in used car prices as that would devalue its inventory, and a pullback in prices is likely as interest rates rise.

 During Carvana’s most recent quarterly announcement on April 20th, the company reported a bigger-than-expected quarterly loss along with revenue that beat analyst expectations.  Results showed a $1 billion increase in equity along with $3.275 billion in debt.  

Carvana may look like a bargain down more than 80% from its ATH just a few months ago, but with interest rates rising and growing concerns of a looming economic recession, the company could be further wrung out as economic growth slows.

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) and delay visions of recovery in the second half of the year.  

Analysts are not overly optimistic about Canadian Pacific.  The 18 analysts offering a first quarter forecast for CP see a 5% year-over-year decline in revenue and expect 0.70 per share in earnings, representing a 17% 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 6% over the past month, the downward momentum is likely to continue until headwinds abate.