Daily Stock Pick: November 6th, 2021

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.  

Digital real estate company Zillow Group (ZG) tops this week’s list of stocks to sell or avoid after reporting disappointing Q3 numbers, and that it would be winding down Zillow Offers, it’s business that buys and flips homes.  

Analysts expected Zillow to report $2 billion in revenue for the third quarter, but the company missed the mark, reporting $1.7 billion.  Included in the company’s third-quarter financial results is a write-down of approximately  $304 million in inventory within the Homes segment due to purchasing homes in the third quarter at higher prices than the company’s current estimates of future selling prices. The company further expects an additional $240 million to $265 million of losses to be recognized in the fourth quarter, primarily on homes it intends to purchase in Q4.  Additionally, Homes segment Q3 revenue is below the company’s previously provided outlook range due to resale capacity constraints that pushed several closings into Q4 that were previously expected to close in Q3.

Zillow had been already in the spotlight earlier this week following reports that it was looking to sell about 7,000 homes. On October 18th, Zillow had said that due to a backlog in renovations and operational capacity constraints, its Zillow Offers business would not sign any new, additional contracts to buy homes through the end of the year.  During the earnings call, Zillow announced its plan to exit Offers, the iBuying service in which Zillow acts as the primary purchaser and seller of homes. The wind-down is expected to take several quarters and will include a reduction of Zillow’s workforce by approximately 25%.

Several firms downgraded ZG in response to the news.  BTIG analyst Jake Fuller downgraded Zillow to Neutral from Buy.  Stating that removing iBuying from his sum-of-the-parts framework leaves his model with a wide fair value range of $66 to $109 per share.

Also downgrading the stock to Neutral from Overweight with a price target of $78, down from $117, Piper Sandler analyst Thomas Champion argued that while the company’s Offers home-buying business news “caps the uncertainty” surrounding the pause first announced on October 18th, the “major strategic shift” raises questions about Zillow’s future direction and execution capability. 

Peloton (PTON) also makes the list this week due to its disappointing earnings and significantly reduced outlook for fiscal 2022.

Stay-at-home culture lifted PTON to great heights throughout 2020, surging above $160 during last year’s holiday season.  Sadly, the past year has not been kind to Peloton as reopening headwinds seem too much for the company to handle.  The company’s failure to execute amid growing competition in the space has dragged share price down more than 60% this year. 

A large part of that loss came after the company reported a steep revenue miss on Thursday’s earnings call.  The consensus was looking for $1.51 billion in revenue for the first quarter and $5.4 billion for fiscal 2021.  The reported figures fell short, further disappointing investors.  Peloton reported $1.1 – $1.2 billion in revenue for the first quarter and $4.4 – $4.8 billion for FY21.  The company attributed its lackluster performance to a greater than expected tapering in retail visits and website traffic.  

To make matters worse, Peloton’s outlook for FY22 was less than rosy.  The company said that the supply chain crisis and higher freight costs led them to lower guidance for the year.  The company further stated that its team has never seen a more complex operating environment in which to guide or expect results.  Hardware margins are seeing compression from supply chain and logistics issues limiting visibility into future performance.  The company lowered FY22 revenue guidance that was initially provided last quarter by $800 million.   

Peloton was downgraded at several firms on Friday, and its price target was slashed.  Stifel analyst Scott Devitt downgraded Peloton to Hold from Buy with a price target of $70, down from $120.  The analyst says the company’s fiscal year outlook has seen “rapid deterioration.”

Last up is Blackberry (BB).  The stock has been a rollercoaster in 2021, thanks to the company’s meme stock status.  An insane spike in January sent the share price rocketing more than 200%, from less than $8 a share to more than $28 a share in less than 2 weeks.  After an embarrassing security scare (and attempted cover-up), BB settled at a price around $10, which is considerably less than its $25.10 close from January 27th.  Considering its meme stock status, wild price action would not be surprising, but a closer look reveals a bleak picture for BB in the long term.  

In terms of forward EV/EBITDA, BB is currently trading at 285.29, which is 1,560.9% higher than the 17.18 industry average. Its 9.33 forward Price/Sales multiple is 128.5% higher than the 4.09 industry average.

BB’s revenue declined 32% year-over-year to $175 million in its second fiscal quarter, ended August 31st. Its operating loss stood at $74 million, while its net loss and loss per share came in at $144 million and $0.25, respectively. Analysts expect BB’s revenues to decline 14.6% year-over-year to $785.14 million in the current year. The company’s EPS is expected to remain negative until at least 2023.