Three Stocks to Avoid for the Week of January 3rd

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.  

School bus maker Blue Bird Corp. (BLBD) could be the beneficiary of increased infrastructure spending in the years to come.  However, ongoing supply chain disruptions and increasing costs of materials have taken a toll and are expected to hold back 2022 production.  BLBD makes our list of stocks to avoid after a dismal earnings call where the company reported misses on the top and bottom lines for the fourth quarter and lowered 2022 guidance.  

The company cited supply chain snags as the cause for its Q4 production miss.  Over 2,000 school bus deliveries were pushed back into fiscal 2022.  Things could get worse before they get better for Bluebird.  Sure, the company’s backlog is at a record high, but the 4,200 units currently in backlog are mostly at fixed price commitments that predate an 11% price increase for inflation, and there has been talk of at least one more price increase in 2022.  

Roth Capital analyst Craig Irwin recently lowered the firm’s price target to $13 from $21 and kept a Neutral rating for BLBD.  The analyst cited the “ugly Q4 results” and uncertainty around the expected infrastructure funding, due in part to heavy funding support for EV busses.  

The good news for Blue Bird is that school bus demand has largely recovered to pre-pandemic levels, and order strength has returned.  Until supply chain and material cost issues are in the rearview, we’ll stay away from this one.  

Leading medical technology company Medtronic Inc. (MTD) makes our list of stocks to avoid this week after receiving a warning letter from the FDA regarding its California facility, the headquarters for its diabetes business.  The warning letter was issued following an inspection that concluded in July related to recalls of the MiniMed 600 series insulin infusion pump and a remote control device for MiniMed 508 and Paradigm pumps.  The warning letter focuses on the inadequacy of specific medical device quality system requirements at the facility in the areas of risk assessment, corrective and preventive action, complaint handling, device recalls, and reporting of adverse events.

The letter was the main point of discussion on the company’s year-end call with management and analysts.  The company said it’s too soon to predict the warning letter resolution timeframe.  The company went on to provide a vague outlook for potential FY22 and 23 sales impact.

Following the call, JPMorgan analyst Robbie Marcus downgraded Medtronic to Neutral from Overweight with a price target of $105, down from $130. The analyst also removed the shares from the firm’s Analyst Focus List citing pipeline setbacks that “complicate” Medtronic’s turnaround.  With setbacks to the company’s most significant pipeline products, renal denervation, 780G, and Hugo, management “has work to do to resolve these issues and prove to investors it can execute this turnaround story,” says the analyst.  Marcus now views Medtronic shares as fairly valued.

Digital real estate company Zillow Group (ZG) made our list after reporting disappointing Q3 numbers and that it would be winding down Zillow Offers, its 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 a number of closings into Q4 that were once 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. Back on October 18, 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 18, the “major strategic shift” raises questions about Zillow’s future direction and execution capability.