While the jury’s still out whether the economy and the market is headed for a soft or hard landing, as interest rates remain high, that doesn’t mean you should forget about which stocks to avoid.
Even as it’s possible that recent fears of another downturn for stocks may prove to be an overreaction, there are particular equities that still have substantial downside risk.
Some of these are shares in companies experiencing certain headwinds, which may keep worsening before they start to improve.
In other situations, the company in question is knocking it out of the park, but with expectations and valuations sky-high, any sort of misstep or hiccup could lead to a serious reversal in price.
Each of the seven stocks to avoid listed below fits into either one of these two categories. If you own them, consider now the time to sell. If you don’t own them yet, stay away.
American Airlines (AAL)
Like other airline stocks, American Airlines (NASDAQ:AAL) has nosedived since the summer. Yet while shares in this legacy carrier have fallen down to prices last hit during the onset of the Covid-19 pandemic in 2020, don’t assume now is the time to make this stock a bottom-fisher’s buy.
Citing waning demand, plus spiking labor and fuel costs, American just recently slashed its 2023 earnings forecast. Even as CEO Robert Isom talks of “robust demand” in 2024, and AAL stock trades at a heavily discounted 4.85 times estimated 2024 earnings, you may not want to wager on a swift recovery for shares.
The fact low-cost rivals are easing capacity growth calls into question Isom’s “robust demand” statement. As the post-pandemic “revenge travel” boom keeps fading, AAL’s earnings could continue to decline as well in the coming year, resulting in a further drop for the stock.
Affirm Holdings (AFRM)
Since late 2021, Affirm Holdings (NASDAQ:AFRM) shares have plunged sharply in price. Changing economic conditions have severely affected perceptions about this provider of “buy now, pay later” financial services.
But if you’re looking to fade the skeptics on the crowded short side of AFRM stock (around 20% of outstanding float has been sold short, according to Fintel), on the view that current challenges are priced in, the short side may be on the money here. Largely, because the other shoe has really yet to drop.
What do I mean? Although Affirm’s growth has slowed down, and operating losses have ballooned, this has taken place against the backdrop of a relatively resilient U.S. consumer. However, if unemployment goes up in the coming year, this could bring the continued consumer splurging to an end. Leading to a further negative impact on this company’s fiscal performance.
Disney (DIS)
Disney (NYSE:DIS) has declined by more than 50% over the past two years. Following this sharp price decline, you may think that the myriad of challenges that this media conglomerate is currently facing is already baked into its share price.
But as Louis Navellier and the InvestorPlace Research Staff recently argued, given that cord-cutting is accelerating, while at the same time streaming competition is rising, raising prices and slashing costs is hardly a silver bullet. Sure, DIS stock has other catalysts.
Examples include the online gambling partnership the company’s ESPN unit has entered with Penn Entertainment (NASDAQ:PENN), or even a monetization of its ESPN property.
However, while a deal worth billions, the Penn partnership isn’t likely to be a long-term needle mover. Analysts are doubtful that strategic alternatives with ESPN will produce a windfall. All of this points to DIS being one of the stocks to avoid.
DraftKings (DKNG)
After looking at three stocks facing big issues, let’s look at DraftKings (NASDAQ:DKNG), one of the stocks to sell, despite relatively bullish sentiment up until recently. Shares in this online gambling operator resumed being a crowd favorite earlier in 2023.
DKNG stock has more than doubled in price, thanks to strong results, and rising confidence that the company is on the verge of hitting profitability. However, enthusiasm for shares has waned, perhaps because of valuation concerns.
Valuation concerns alone aren’t a strong reason to go bearish on a stock, but there soon could be reasons to be bearish. As I recently argued, further improvements to DraftKings’ operating performance may prove challenging. While DKNG stock may not be at risk of coughing back all of its gains from this year, a further retreat to lower price levels is possible.
Lucid Group (LCID)
Lucid Group (NASDAQ:LCID) has for quite some time been one of the top stocks to avoid. While other high-profile, early stage EV makers like Rivian Automotive (NASDAQ:RIVN) haven’t exactly experienced big time success just yet, Lucid by comparison has been an abject failure of an EV startup.
Still, even as Lucid’s already-lackluster delivery numbers keep falling, and the company has had to resort to a referral program in order to drum up interest in its electric vehicles for the luxury market (as InvestorPlace’s Josh Enomoto recently discussed), some still believe that success sufficient to lift LCID stock back higher will finally arrive.
My view? Don’t hold your breath. Little suggests that improved delivery numbers are imminent. Expect Lucid to keep burning through cash, causing further dilutive capital infusions. Now buried in penny stock territory (under $5 per share), expect LCID to continue careening towards the stock market junkyard.
Novavax (NVAX)
The popularity of pandemic vaccine stocks has long since passed. Yet while there may be a chance names like Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) might recover from their respective “vaccine stock hangovers,” don’t expect the same for Novavax (NASDAQ:NVAX) shares.
Achieving minimal success with its Nuvaxovid, this vaccine contender’s candidate failed to produce a windfall for the company. In fact, as the company failed to get U.S. regulatory approval in time, Novavax reported big losses in 2021 and 2022.
Although now able to sell Nuvaxovid stateside, recently received approval for an updated version, consider this too little, too late.
Burning through hundreds of millions each quarter, and expected to keep losing money for the foreseeable future, don’t expect the performance of NVAX stock to stabilize. After dropping from over $300 to around $6.50 per share, a move to the low single-digits may be next.
Planet Fitness (PLNT)
In September, I declared Planet Fitness (NYSE:PLNT) one of the top stocks to avoid, not once, but twice. Yet while shares in the gym franchising company have moved higher since then, I still believe this to be a name to include in the “stocks to sell” category.
Yes, it may seem like the market oversold PLNT stock last month, simply upon news of the unexpected exit of Planet Fitness’s longtime CEO. However, even if investors overreacted, this isn’t the only negative development at play right now with the company.
Following high inflation and rising interest rates, one can say that Planet’s franchise model is broken. Although management is hinting that it plans to adapt to the new normal, only time will tell whether this helps improve unit growth.
Without sufficient growth, PLNT’s valuation, still at a premium to peers like Life Time Group Holdings (NYSE:LTH), will keep falling.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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