There’s a decent chance that any stock investment is bound to decline in value right now. The Federal Reserve recently instituted its fourth consecutive 75 basis point (0.75%) interest rate hike. This move signaled that the ultimate terminal rate required to bring down inflation may be higher than initially anticipated. For most stocks, this has resulted in lower lows of late as investors remain spooked.
The concerning issue among many investors is that the Fed will ultimately break something within the economy. Predicting what that domino effect will be remains difficult. But the higher rates go, the higher the likelihood that something fails. Whether the economy breaks in 2023 as more pundits are predicting, or sooner, markets will drop. That falling tide will bring all ships lower.
But even if none of that occurs, these three stocks are those that smart investors shouldn’t touch with a 10-foot pole. I would caution investors to avoid these seemingly-cheap stocks until more economic certainty can be had.
| WISH | ContextLogic | $0.64 |
| PTON | Peloton | $8.76 |
| Z | Zillow | $32.42 |
ContextLogic (WISH)
ContextLogic (NASDAQ:WISH) stock might appear to be a hidden bargain, based on its target price alone. After all, the five analysts covering WISH stock have assigned it a target price of $3.09. That’s orders of magnitude higher than where this stock currently trades at sub-70 cents.
Don’t be fooled. The discount e-commerce platform is dying a slow death. The company continues to sustain large losses, and this year, its revenues have fallen off a cliff.
Through the first half of 2021, Wish reported $1.428 billion in revenues which resulted in a $239 million net loss. During the same period in 2022, revenues declined 77.4% to $323 million. That precipitous drop still led to a $149 million net loss. Thus, the company loses money in “good” times and in bad.
The problem is that ContextLogic is underpinned by an unsustainable business model. For lack of a better description, it sells junk.
To the company’s credit, it beat expectations. But don’t let that charm you into investing in WISH stock. The company is going to continue to falter until it replaces the cheap, impostor goods it sells. This platform has become notorious for doing so.
The company’s recent results speak to ContextLogic’s dire outlook. It reported $1.405 billion in cash at the end of Q2 2021. A year later, that figure fell to $701 million. If this cash burn rate continues, ContextLogic might have a negative cash balance a year from now.
Peloton (PTON)
Peloton (NASDAQ:PTON) stock proves that market irrationality remains high following its Q1 earnings release on Nov. 3. There were few positives to be taken from that report. Despite its fundamental issues continuing to worsen, PTON stock shot up 8% on the day after initially falling on the news. The only explanation for this bump is the company’s narrowing losses and a vague promise from CEO Barry McCarthy that Peloton’s turnaround remains on track.
Except I don’t think this turnaround story is really intact. The company’s revenues declined 23% on a year-over-year basis, falling to $617 million. That was well below the low end of Wall Street’s anticipated range of $625 million to $650 million.
Investors who’ve temporarily propped Peloton up are grasping at straws. The firm posted a net loss of $408.4 million in the quarter. Those investors were thrilled because Peloton posted a much steeper $1.3 billion net loss a quarter earlier.
They seem to be willfully neglecting the fact that the company stated that sales are likely to be 37% lower in this year’s holiday season. Indeed, the company’s turnaround narrative is underpinned by the notion that Peloton can once again be cash flow positive, perhaps by next summer. I don’t think that’s likely, considering the stark reality that consumers don’t want its products as they did before.
Ultimately, what winning companies do is find ways to sell more of their products and services. Simply stopping the bleeding isn’t enough for long-term investors looking for reasonable growth.
Zillow (Z)
A recent earnings beat and surge in Zillow (NASDAQ:Z) stock should be short-lived. Right now, I think smart investors should steer clear of the housing information services and mortgage platform.
On the one hand, Zillow did provide relatively strong earnings, surpassing the higher end of guidance range. The company’s $483 million in sales was an unexpected positive for the firm. Accordingly, this report led to impressive buying activity in Z stock that sent prices rising for the day. That said, I think it’s difficult to expect that trend to last for long, given that Zillow immediately gave guidance that revenues should fall in the range of $395 million to $425 million moving forward.
Mortgages only accounted for $26 million of Zillow’s revenues in the quarter. The lion’s share of its revenues instead came from its internet, marketing, and technology (IMT) segment. So, while the company many not be as directly exposed to interest rate hikes as home builders or investors with greater physical inventories of homes, Z stock is still likely to will suffer.
Simply put, the company’s bread and butter IMT segment will decline further, depending on how bad the housing market becomes. Mortgage rates are going to continue to rise in the wake of the Fed’s latest 75 basis point hike. The higher they go, the greater buying demand will cool. For Zillow’s overall business, that’s not a great thing at all.
On the date of publication, Alex Sirois 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.