Three Stocks to Avoid for the Week of June 27th, 2022

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.  

Over the past couple of weeks, the market’s confidence in digital currencies has been rattled, possibly to the point of no return. The move lower in cryptos has led to a more than 60% decline this year for MicroStrategy Incorporated (MSTR), a leading worldwide provider of business intelligence software.

You’re likely wondering why the enterprise software company has been so profoundly affected by the decline in cryptos. Well, the answer may shock you. Executive Officer Michael Saylor has gone all-in on Bitcoin over the past two years. Since May 2020, MicroStrategy has purchased nearly $4 billion worth of Bitcoin.

However, MicroStrategy didn’t buy Bitcoin with its own money — the company borrowed part of it. On March 29th, MicroStrategy announced that it had secured a $205 million loan from Silvergate Capital to purchase Bitcoin. And it collateralized this loan with Bitcoin. It was a decision that seemed brilliant when he invested billions in the top crypto as it was surging. But it’s been disastrous on the way down as BTC price has plunged more than 50% since the purchase.

Chaos in the crypto market is intensifying. At the time of writing this, the price of Bitcoin is at about $21,000, meaning the company will likely need to provide more collateral to avoid liquidation. According to its Q1 presentation, MicroStrategy has over 95,000 Bitcoins it can use to satisfy its lending agreement with Silvergate Capital at a loss to the company.

 Even if the company’s Bitcoin position isn’t liquidated, it has more than $1.6 billion in convertible senior notes due in 2025 and 2027. Until there’s a concrete plan to create shareholder value with Bitcoin, MSTR is one stock we’re staying away from. 

Medical technology company Medtronic Inc. (MDT) made our list of stocks to avoid following a rough finish to a fiscal year wrought with turmoil. The company was already struggling to recover from medical device recalls and an FDA warning when China enforced Covid-related lockdowns. During its fiscal fourth quarter of 2022, revenue from China, which accounts for over 40% of the company’s emerging markets revenue, declined 10%.

Medtronic missed on both the top and bottom lines for Q4. Revenue came in at $8.09 billion, which was 4% below expectations for $8.43 billion. Earnings per share came in at $1.52, about 2% off expectations of $1.56.

The medical device maker has also been facing higher raw material, labor, and transportation costs stemming from inflationary and supply-chain challenges. Against this backdrop, the company cautiously lowered its guidance for its financial year 2023. Management now expects adjusted earnings for financial year 2023 of US$5.53 per share to US$5.65 per share, below analysts’ estimates of US$5.82 per share. “Supply chain, inflation, and foreign exchange are expected to create near-term pressure,” commented Medtronic chief financial officer Karen Parkhill.

MDT’s share price has plunged nearly 15% since the May 26th call. Many of the obstacles over the past year remain unresolved for the industry and Medtronic. We’re avoiding this stock until concerns abate. 

Shoals Technologies (SHLS) is a key player in the solar industry, mainly serving engineering, procurement, and construction firms building solar projects. The company enjoys a leadership position in the solar electrical balance-of-system market and has enjoyed robust margins. However, analysts on Wall are beginning to wonder if the sun is setting for SHLS. The stock is off more than 26% this year, and competition in the space could make for a complicated recovery.  

As such, Shoals is the recent recipient of a no-moat rating from Morningstar’s Brett Castelli. “We think uncertainty here is very high, owing to the company’s concentrated customer base (its top three customers accounted for 40% of sales in 2021) and the cyclicality of the solar industry, he adds. We think shares are worth $13.50 each; they’re trading 27% above that,” the analyst noted.  

Shoals’ share price is down considerably from its February 2021 peak. But at more than 150 times forward earnings, SHLS is anything but a bargain.