Three Stocks to Avoid

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 to 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.  

SaaS customer service platform developer Zendesk (ZEN) is first up on our list after announcing plans to buy Momentive (MNTV), a customer experience solutions provider.  ZEN would acquire MNTV for $4 billion in stock, equating to almost one-third of Zendesk’s market cap.     

The pros on Wall Street were not pleased by the acquisition that Zendesk said will be “growth accretive” by 2023.  Analysts slashed their ratings and price targets on Zendesk because of the hefty dilution and the risk of spending so much on a business that’s growing more slowly than the acquirer. Zendesk’s revenue is on pace to grow almost 30% this year, while Momentive is expected to grow by just under 20%.

Piper Sandler analyst Brent Bracelin downgraded ZEN to Neutral from Overweight, lowering his price target to $122 from $175.  The analyst sees near-term integration risks and potential shareholder dilution with Momentive shareholders poised to take a 22% ownership stake in the combined Zendesk business post the deal close. He’s comfortable moving to the sidelines, pending better visibility into the combined business models’ combined growth trajectory.

Zendesk was already lagging behind its peers prior to the announced acquisition.  While the WisdomTree Cloud Computing ETF (WCLD), which tracks a basket of cloud stocks, was up 16% YTD as of Thursday’s close, ZEN was down 15%.  After the announcement, the stock bled another 15% to close Friday, nearly 27% lower for the year. 

2021 has been a period of transition for Zendesk.  After missing earnings and revenue estimates in July, for the first time since its 2014 IPO, the outcome for ZEN seems murky.  With heavy competition in the sales and marketing software markets, ZEN may have to play defense for a while. We’ll be watching from the sidelines until ZEN’s trajectory is clear.  

Next up is the aerospace and defense technology company, L3Harris Technologies Inc. (LHX).  The company provides defense and commercial technologies across air, land, sea, space, and cyber domain.  In the past six weeks, LHX stock has seen a downward trend in fresh estimates and bled nearly 5% in the same period.  Some analysts think the stock has more to lose.

Among analysts who have recently downgraded the stock is Goldman Sachs’ Noah Poponak, who downgraded the stock from Neutral to Sell.  Poponak told investors in a note , “A deceleration in the U.S. defense budget growth rate will likely translate to a multi-year deceleration in L3Harris sales.” He added, “Margin upside that was driven by merger integration has now likely played out, leaving less upside to margin estimates.” With the stock significantly outperforming its large-cap defense peers over the last six months, the analyst no longer sees a “relative valuation gap” in the stock.     

The company also recently lowered its 2021 guidance range.  L3Harris currently expects to generate revenues of $18.1-$18.5 billion, compared with the prior guidance range of $18.5-$18.9 billion, during 2021. The company’s 2021 earnings are now projected to be in the field of $12.80-$13.00 per share, compared with the previous guidance of $12.70-$13.00.

Finally, TripAdvisor’s (TRIP) makes our stocks to avoid list again, as their voyage downward continues.  Since mid-March, TRIP stock price has been tumbling downward, and it doesn’t seem likely to make the return trip anytime soon.  Especially not after major hotel chains joined forces last month to force TripAdvisor to reverse course on its subscription to a cash-back instead of hotel discounts, seemingly taking the wind out of the company’s Tripadvisor Plus program.  

“This shift is a big departure for Tripadvisor, having previously pushed Tripadvisor Plus as offering ‘no brainers’ to customers and enticing them with best in class rates,” said Bernstein analyst Richard Clarke. “The new model makes sense and could offer good deals to customers, but will be in a competitive space with, Hopper and Revolut also offering cash back/credit on bookings with also charging a $99 fee.  This might ultimately be a test if Tripadvisor Plus can be a full-service travel subscription offer, not just a discount club.”

Mizuho analyst James Lee lowered the firm’s price target on TripAdvisor to $42 from $50. The analyst believes the travel recovery story has been pushed back to fiscal 2022 instead of the second half of 2021.

Recent heavy put volume for TRIP is another cause for concern and could indicate that investors are becoming more bearish on the stock ahead of the November 4th earnings call.  The consensus analyst recommendation is to Hold TRIP stock. We’ll be keeping an eye on the stock as the next earnings release nears, but we’ll stay away until headwinds clear.