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 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.  

Enterprise AI software provider (AI) tops our list of stocks to avoid after a disappointing Q2 earnings call.  The company delivered revenue and margin performance modestly above consensus expectations and lifted 2022 guidance slightly but featured a bleak revenue picture.  Not including the impact of a recent agreement with Baker Hughes (BKR), subscription revenues were far lighter than expected.  This means that reported Remaining Performance Obligations significantly decreased for the quarter.  These execution challenges could not come at a worse time considering the recent departure of CFO David Barter. 

The company faced adversity right out of the gates of its December 2020 IPO.  After a choppy first few quarters, is at a fork in the road.  Over the coming year, a flawless execution will be required if the company is going to rebuild credibility with investors and prove its vision.  

Against this backdrop, the challenges that faces could be enough to weigh the stock down in the near to midterm.  Current conditions create far too much uncertainty to consider a position in AI, even though the stock is 24% lower than where it started on Monday before the Q2 subscription revenue debacle was revealed.  We’ll stick to the sidelines until a more straightforward picture forms.    

TripAdvisor’s (TRIP) makes our stocks to avoid list again, as their voyage downward continues.  Since mid-March, TRIP stock price has been stumbling downward and 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, citing the disruption in travel trends in Q3 by new delta cases, which caused student travel restrictions and consumer hesitancy heading into the October holiday.  The analyst believes the travel recovery story has been pushed back to fiscal 2022 instead of the second half of 2021.  With omicron developments, that timeline could be further extended.   

Late this week, our team noted unusually heavy put volume for TRIP, signaling a bearish flow with 1.7x expected volume trading on Thursday.  The most active strike being March 22nd at $25. TripAdvisor is slated to report quarterly earnings on February 11th.

Last up on our list of stocks to avoid is Big Lots (BIG).  Challenges that the company is facing include supply chain bottlenecks, increasing freight expenses, labor challenges, and competition in food-/consumables.   

On Friday, the company reported an EPS miss and lowered guidance for Q4 and FY 2021 EPS to $5.70-$5.85 from $5.90-$6.05.  “The impact of freight headwinds for the full year is expected to result in a 120 basis point decline in full-year gross margin compared to last year,” the company said.

Many of the Wall Street pros covering the stock foresee freight headwinds and volatile supply chain costs that will last into the new year and beyond.  The stock has recently received numerous downgrades, including one from Piper Sandler analyst Peter Keith.  The analyst downgraded Big Lots to Neutral from Overweight, saying in a note to clients that the economic environment was turning sour for the retailer.

“We see a trifecta of macro headwinds impacting fundamentals through the first half of 2022,” Keith wrote.

“These include the end of two years of stimulus check tailwinds in next year’s first half; ocean freight rates continue to intensify to all-time highs and are likely a gross-margin drag through the first half of 2022, and retail industry wage pressure seems unlikely to materially abate any time soon,” he added.

The stock has been on a major descent, dropping almost 30% over the past six months.  Piper Sandler lowered its price target on the stock to $50 per share from $60.  That’s 13% above where shares of Big Lots closed on Friday.