These six sucker stocks may look like bargains right now, as they have all recently fallen quite dramatically. However, their underlying problems or simply the fact that they have apparent problems could wear away at their stock prices over the long term.
In some cases, the stock may have issued a profit warning. And in others, it may have actually reported lower earnings. In any case, I follow the principle of “where there’s smoke, there’s usually fire.” In other words, there are simply too many other good stocks to pick from than a falling knife situation.
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So, with that in mind, let’s dive in and take a closer look at these seven stocks to avoid.
Abercrombie & Fitch
Stocks to Avoid: MSP Recovery (MSPR)
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MSP Recovery (NASDAQ:MSPR) closed its special purpose acquisition company (SPAC) merger on May 24 and subsequently fell out of bed. The Medicare litigation and technology company fell 32% on Friday, May 27, down to $1.74 per share.
MSPR shares were at $5.06 after their market debut on Tuesday, down 53% from their pre-merger close of $10.78 on Monday, May 23.
The huge drop occurred after Forbes magazine came out with a skeptical article on May 25 on the company and its founders. The article claims that at Tuesday’s close the stock was trading at a value of around $10.8 billion. At the current price of $1.26, that lowers its market value to about $3.71 billion. But Forbes points out that in 2021, MSP Recovery reported a net loss of $33 million on $14.6 million in revenue. In turn, the article raised doubts about its ability to generate revenue that justifies the high valuation. And the company immediately came out with a statement that disputes the claims in the article.
Collectively, this is a “smoke and fire” kind of stock. So it’s best to stay away at least until the issues are clearer and it looks like a clear bargain.
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Robinhood (NASDAQ:HOOD) announced results on April 28 showing that its revenue for Q1 was down 43% to $299 million, compared with $522 million in the first quarter of 2021. Moreover, its net loss was $392 million, or a loss of 45 cents per share.
People, especially Millennials, are not trading cryptos, options and meme stocks as much as before, putting a huge dent in its transaction revenue. Don’t expect this situation to turn around until the market stops worrying about a recession.
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At this point, given that the Federal Reserve is intent on raising rates even further, the markets will remain jittery for a while. That means stay away from HOOD stock, at least until the market hits another lower bottom.
Stocks to Avoid: Snap (SNAP)
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Snap, Inc. (NYSE:SNAP) issued a profit warning on May 23. This was done in an SEC filing stating that its expectations for Q2 revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) will not meet the low end of its prior guidance.
As a result, the stock fell from $22.47 on May 19 prior to the announcement to now sitting at a price of $13.96 per share, a drop of 38% in about two weeks. The reason is the company said the “macroeconomic environment had deteriorated.” That affects the general level of advertising that is flowing to the company.
This could get worse than even now expected, especially since the Fed is intent on raising interest rates even further. The decline in ad revenues may not have hit a bottom, even though the market is discounting a huge decline already.
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Pinterest (NYSE:PINS) could be hit by the same macroeconomic forces that are reducing ad revenues for Snap. In fact, PINS stock is already down 17.5% from May 19, right before the Snap profit warning.
Pinterest relies on the same type of large, general advertisers that Snap uses. That said, these companies clearly are reducing their digital ad budgets given the fickleness in the economy.
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Moreover, as The Wall Street Journal recently reported a number of retailers are getting hurt more than consumers. The companies and brand companies are expecting a drop in consumer spending soon.
Stocks to Avoid: Abercr0mbie & Fitch (ANF)
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Abercrombie & Fitch (NYSE:ANF) is another beaten-down member of the “stocks to avoid” group. Just recently, the fashion retailer reported an unexpected Q1 adjusted loss of 27 cents on May 24. This was in stark contrast to analysts’ expectations of positive profits.
In fact, according to Seeking Alpha, analysts were looking for a normalized earnings per share (EPS) of 7 cents per share. That is quite a shock and it hit investors hard.
The company blamed its losses on higher-than-expected freight and product costs. Investors can expect that the company will either have to raise prices. This could slow down sales, or else the retailer will have to keep eating losses going forward. Either way, this is not good for investors going forward.
Nonetheless, analysts are still positive on the stock. They project earnings of $2.02 for 2022 and $2.95 for 2023. That puts ANF stock on a trailing price-earnings ratio (P/E) multiple of 7.11 times this year, and a forward P/E ratio of 9.
The problem earnings might not be higher next year if the economy hits a recession. That’s why this could be a sucker stock and investors should stay clear. The likelihood of another earnings surprise on the downside is still very high, and that’s why it remains one of the stocks to avoid.
Grab Holdings (GRAB)
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Grab Holdings (NASDAQ:GRAB) is a Singapore-based company that provides ride-hailing and food delivery in a number of Southeast Asian companies. The stock took a hit last week after news emerged that two more executives at the company’s fintech quit. But that’s not all, as Reuters reported that other senior executives have left in recent months too.
Furthermore, the company reported a loss of 11 cents per share on May 19 for the most recent quarter ending March 31. The company also reported that its adjusted EBITDA loss widened to $287 million vs. a loss of $111 million a year ago. This was despite a 6% higher revenue of $228 million compared to a year earlier.
In other words, the company’s earnings losses are widening. And if a global recession occurs, this will hurt the stock. So, like Abercrombie & Fitch, this one is also among the stocks to avoid.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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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