General investment concepts have not changed much overtime. The idea is to find opportunities before the masses do. The strategies, on the other hand, have morphed into something different. We now have a new breed of traders that are trying to make waves. Therefore, there are a lot of stocks to avoid at these levels.
This transition phase creates special circumstances of undue risk that is easy to sidestep.
Investing these days is happening in memes and this may not last. Wall Street may revert back to more traditional concepts. These new trends may simply be fads and may not stick. The pandemic changed a lot of things, but I don’t believe that investing is one of them. The habits that investors have developed in the last 16 months may be temporary.
Today we will identify three stocks to avoid for the next few weeks. These are not necessarily nasty judgments against the companies or their efforts. The arguments are mostly based on weighing the rewards versus the potential pitfalls. It is also important to recognize the overall equity market scenario. The indices are still making records – even on bearish weeks.
Last week, the S&P 500 and the Dow made new highs, while equities struggled. This is normally good news but the stimulus remains the main fuel for this rally. The Federal Reserve prop is largely responsible for the rally since December 2018. Last week, we saw a tangible spike in the CPI. A rise in inflation will tie the Fed’s hands much sooner than their 2023 forecast.
There are extrinsic risks that could cause a downside scenario in the entire stock market. Our stocks today are especially vulnerable under that scenario. Therefore, it is reasonable to be cautious, if not outright short. The three tickers in question are:
- Comcast (NASDAQ:CMCSA)
- DoorDash (NYSE:DASH)
- ContextLogic (NASDAQ:WISH)
Stocks to Avoid: Comcast (CMCSA)
Comcast is a 60-year-old company so I definitely have no beef with its merit. My contention today is that the price action has gone further than reality. When a company is this mature, it is easy to judge its stock price. From the financial statements we surmise that the revenue line is growing and that’s great. But the profit margins have sharply deteriorated.
The trailing 12 months net income is now half of what it was in 2017. We can’t attribute that to the pandemic because it was already down 40% in 2019. Clearly that’s nothing to celebrate, let alone make new all-time highs. Logic suggests that CMSCA stock being 75% above 2017 is a clear risk to investors.
At these levels I am very confident in saying that this is not an obvious entry point. The right decision here is to avoid it or at least lock some profits. The company pays a small dividend but in line with the 10-year U.S. bond. In the absence of a headline, it belongs in the list of stocks to avoid for a few weeks. Technically, there are supports at $52.50 and $47.50 per share. Those would make for entry points with better odds.
I was a fan of catching this falling knife when everyone hated it. This was as recently as last week going into its earnings report. Investors made a mistake selling DASH stock too aggressively. I wrote about catching the falling knife many times before and with good timing. Clearly I don’t have a problem being positive on it.
My caution here is temporary and because of the size of the bounce last week. DASH spiked 22% in one day and on the back of one report. This is a problem for me because it is not logical behavior. Also technically it is now going to face resistance on the way up. Every battle line they tried to hold while falling is a struggle going forward.
My bearish sentiment on DASH stock is the most transient of the three today. I would flip bullish on a retest of the floor from last week. Therefore, today’s call is to avoid chasing until this hard bounce fades. Then the smart thing to do is snipe a better entry from lower levels. There is short-term support fresh from May 13 where I would also place my stops.
My comments are more for trading purposes. From an investment perspective, I can’t fault investors who want to hold it for the long term.
Stocks to Avoid: ContextLogic (WISH)
On the one hand, the P&L of WISH is great, as the metrics are going in the right direction. Revenues more than doubled from 2017. Last week, they reported a 75% increase year-over-year. Their progress is clearly tangible. On the other hand, this is a broken stock and and falling into an abyss. There is no sign of stabilization and every effort to set a bottom has failed.
Instead of rallying on the news, the stock crash 30% on the earnings headline. Whatever the reason, investors want nothing to do with it. Trying to catch this falling knife or holding longs is futile. I don’t care what I think of it, if the stock is this toxic, investors need to be realistic. In such situations, it is best to admit that we are missing an important puzzle piece. Therefore the attempt to get long are an absolute wish for a turnaround – pun intended.
This is reason enough to confidently say that this is atop of the list of stocks to avoid. I would like to give management the benefit of the doubt, but I just can’t. The old saying to not fight the tape applies well here. This tape is emphatic with its direction and I should respect that.
This global company has so far failed to gain Wall street’s confidence. It’s not smart to play the hero down here. Finding a bottom is a process and it starts with no new lows. This has not even started yet, so buying it in anticipation is pure hopium.
On the date of publication, Nicolas Chahine did not have (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.
Nicolas Chahine is the managing director of SellSpreads.com.