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…
Estée Lauder Companies (NYSE: EL)
Estée Lauder (EL) is facing significant challenges, and its recent performance suggests that further declines could be on the horizon. The stock has plunged 56% this year, hitting a 10-year low, which signals major concerns from investors about the company’s future. When a stock drops to this extent, it typically reflects a combination of weak fundamentals and significant market skepticism.
The company’s top and bottom lines have been going in the wrong direction. Revenue has been declining, and profits have been falling even faster. The most recent earnings report pointed to weak consumer sentiment in key markets like China, with Estée Lauder expressing doubts that stimulus measures would provide much relief in the near future. To make matters worse, the company announced a 47% cut to its quarterly dividend, which only further eroded investor confidence.
Estée Lauder’s high valuation is another red flag. The stock is trading at a price-to-earnings (P/E) ratio of over 100, and even based on analyst projections, it’s still priced at nearly 37 times next year’s expected profits. For a company facing declining profitability, this high multiple makes the stock expensive and suggests that there is little growth on the horizon.
Given the ongoing struggles with profitability and the steep decline in the stock’s price, Estée Lauder is a stock to avoid for the time being. The company’s uncertain outlook, coupled with its elevated valuation, makes it a risky bet even at these depressed levels. It’s likely that more downside is ahead, and investors may be better off looking for opportunities elsewhere.
Coca-Cola (NYSE: KO)
Coca-Cola (KO) has long been a staple in portfolios, thanks to its consistent dividend increases and impressive historical returns. However, as we head into 2025, the growth story for Coca-Cola seems to be losing steam. Despite its dominant position in the beverage industry, the company is facing slow growth, particularly in its core soda business, which is showing signs of weakness.
Revenue growth has been slowing over the last few years, dropping from 17.3% in 2021 to just under 7% in 2023. More concerning, Coca-Cola reported a 1% decline in revenue for its most recent quarter. Operating margins have also taken a hit, falling to 21.2% from 27.4% a year ago, and earnings per share declined 7% to $0.66. While the company has maintained some positive figures over the first nine months of 2024, with revenue up 2%, net income and operating income have both struggled, down 3% and 19%, respectively.
One of the primary challenges Coca-Cola faces is the stagnant growth in soft drink consumption. IBIS World reports that the soft drink industry has seen a decline in annualized growth of 0.5% from 2019 to 2024. Despite Coca-Cola’s broad portfolio, its reliance on soda sales, which are not growing at the same rate as the broader market, limits future growth potential. In fact, global unit case volume fell by 1% in the most recent quarter.
Coca-Cola’s stock has also underperformed the S&P 500 by over 71% in the last five years, signaling a lack of momentum compared to the broader market. With earnings estimates for 2025 coming in at $2.98 per share, giving the stock a forward price-to-earnings ratio of 21.5, it’s clear that the stock is trading at a slight discount to its five-year average of 26.5. However, given the weak macro environment for soda and Coca-Cola’s reliance on price increases to prop up profits, this valuation isn’t compelling enough for long-term growth.
While Coca-Cola’s dividend yield is still 3%, the company’s slowing revenue and stock performance are cause for concern. With more attractive growth opportunities in the market, like Nvidia, Microsoft, or Chipotle, it’s hard to justify holding Coca-Cola stock in your portfolio right now. Unless there’s a major shift in performance, Coca-Cola is best avoided as we move into 2025.
NetEase (NTES)
NetEase (NTES) has been facing challenges, and its recent third-quarter earnings report highlights some concerning issues. The company missed analyst expectations on both revenue and earnings, with a 3.9% year-over-year decline in GAAP revenue, which amounted to RMB26.2 billion (approximately $3.7 billion). Non-GAAP net income per ADS came in at 11.63 Chinese yuan ($0.33), also falling short of expectations. The core gaming segment, which has traditionally been the heart of NetEase’s business, continues to struggle with increased competition, which dragged down overall performance despite growth in some other segments.
While segments like Cloud Music and Youdao reported growth in Q3, the gaming division faced a 4.2% revenue decline. Although certain titles like Naraka: Bladepoint and new releases such as Lost Light and Once Human are showing promising engagement, they couldn’t offset the broader pressures in the gaming market. Additionally, NetEase’s e-commerce division saw a worrying 10.3% decline in revenue, reflecting softer consumer sentiment.
The lack of specific forward-looking guidance and the mixed performance across different business lines makes it difficult to predict a strong recovery in the near term. While NetEase is expanding its international gaming footprint and diversifying its portfolio, the continued weakness in the core gaming division and the challenging market environment suggest that the company may face further difficulties ahead.
Given these factors, NetEase is a stock to avoid for now. While its diversification into segments like Cloud Music and Youdao shows potential, the company’s struggles in the gaming sector, combined with a lack of clear guidance, point to more uncertainty in the near future. Investors may want to look for opportunities elsewhere until there is more clarity on the company’s growth trajectory.
