The right stocks can make you rich and change your life.
The wrong stocks, though… They can do a whole lot more than just “underperform.” If only! They can eviscerate your wealth, bleeding out your hard-won profits.
They’re pure portfolio poison.
Surprisingly, not many investors want to talk about this. You certainly don’t hear about the danger in the mainstream media – until it’s too late.
That’s not to suggest they’re obscure companies – some of the “toxic stocks” I’m going to name for you are in fact regularly in the headlines for other reasons, often in glowing terms.
I’m going to run down the list and give you the chance to learn the names of three companies I think everyone should own instead.
But first, if you own any or all of these “toxic stocks,” sell them today…
Dell Technologies Inc. (NYSE: DELL) – Margin Pressures and Competitive Doubts
Dell Technologies, known for its robust involvement in the tech industry, has recently ventured into manufacturing high-performance AI servers, essential for developing sophisticated AI models. While strategically this positions Dell at the forefront of AI innovation, the company is struggling to establish a strong presence in this specialized niche.
Despite a notable 22% increase in sales for its infrastructure solutions group (ISG), which houses the AI server business, Dell is facing significant challenges. The complexities and rising costs associated with producing these high-end AI servers are starting to impact profitability. This is evidenced by a slight 1% drop in operating income for the ISG segment, which alarmingly contributes to only 8% of its net revenues. More concerning is the sharp revision in Dell’s financial outlook, where it now expects a substantial decline in margins by 150 basis points for the full year.
This financial adjustment reflects deeper issues within Dell’s strategy in the high-stakes AI server market and raises questions about its near-term competitive edge, as noted by Bloomberg analyst Woo Jin. The heightened costs and operational challenges in scaling this venture have led to growing skepticism among investors regarding Dell’s potential to capitalize effectively on its AI initiatives.
Given these financial strains and competitive uncertainties, it may be prudent for investors to reconsider their positions in Dell. The current market dynamics and internal financial pressures suggest that Dell’s ambitious foray into AI server production might not yield the expected returns, making it a potential stock to sell from your portfolio.
Affirm Holdings Inc. (NASDAQ: AFRM) – Time to Consider Exiting
Despite Affirm’s striking 106% gain since June 2023 and its substantial $10 billion market cap, certain warning signs suggest it’s time to sell. The company, known for its “buy now, pay later” (BNPL) services, faces increasing risks that could undermine its recent success.
Affirm’s model targets consumers with lower credit scores, offering them instant micro-loans at the point of purchase. This approach, while popular, becomes particularly risky in the current climate of rising credit card delinquencies—a trend that often precedes similar patterns in BNPL services. This correlation suggests potential for increased default rates among Affirm’s loans, a risk further substantiated by a significant $84 million increase in the company’s provision for credit losses over the past year.
With the summer spending season likely exacerbating these issues, Affirm’s financial health could be further compromised. Given these factors and the broader economic outlook, Affirm presents a clear candidate for those looking to prune risky tech stocks from their portfolios.
TransDigm Group Inc. (NYSE: TDG) – Overvalued and Overstretched
TransDigm Group, a prominent player in the aerospace sector for both commercial and military aircraft components, currently displays several red flags that suggest it may be time to sell. The company’s stock is trading at an alarmingly high price-to-earnings (P/E) ratio of 52.4, significantly above the industry standard, suggesting a steep overvaluation by the market.
Further deepening concerns, TransDigm’s price-to-earnings-growth (PEG) ratio stands at an excessive 5.02, indicating that the stock price has far outstripped realistic growth expectations. These figures are troubling, especially when compared against investing benchmarks which favor P/E ratios closer to 15 and PEG ratios near 1 as signs of fair value.
A detailed analysis using the discounted cash flow valuation method paints a stark picture: TransDigm’s intrinsic value is estimated at merely $237 per share, a fraction of its current trading price of $1,288.65. This discrepancy suggests that the market’s optimism about future cash flows and earnings potential is grossly overstated.
Given these metrics—particularly the extreme P/E and PEG ratios coupled with the significant gap between market price and intrinsic value—TransDigm emerges as a prime candidate for investors to consider selling. The stock’s current valuation levels appear unsustainable, especially in light of its financials and the broader industry context.
