- Though the broader market volatility has presented intriguing, discounted opportunities, some ideas are simply stocks to avoid.
- Novavax (NVAX) — A huge winner during the height of the coronavirus pandemic, the resultant societal fatigue makes NVAX too risky for conservative investors.
- Teladoc Health (TDOC) — While TDOC has given up all of its post-pandemic gains and then some, the lack of current relevance hurts the telehealth sector.
- GrowGeneration (GRWG) — Unfortunately, the black market for “botanicals” might impede GRWG, making it one of the stocks to avoid.
- Canoo (GOEV) — While a noble effort to bring electric vehicles to the masses, the cost structure just isn’t there for Canoo, making it one of the stocks to avoid.
- Roblox (RBLX) — An intriguing idea when it debuted in the market during the pandemic, RBLX has since lost relevance as people desire real experiences.
- Redfin (RDFN) — In my opinion, the housing boom is likely over due to recession risks and rising interest rates, making RDFN one of the stocks to avoid.
- D.R. Horton (DHI) — Not only is DHI a candidate for stocks to avoid, it might even be one of the stocks to short due to poor outside fundamentals.
Because of the unique circumstances associated with the coronavirus pandemic, a strong temptation exists to buy investments that have bled a copious amount of red ink. After all, meme traders managed to send a dilapidated brick-and-mortar video game retailer into low-earth orbit so the same principle might apply to other embattled companies. Alas, you are better off following common sense and heeding which growth stocks to avoid.
Don’t get me wrong. Bear markets are where true wealth begins because it allows investors to acquire solid companies which happen to be stuck in unfortunate circumstances. Historically, the U.S. equities sector has bounced back from various trials and tribulations so in theory, this present circumstance should be no different. Nevertheless, you need to be wary of certain growth stocks to avoid.
Essentially, some businesses are tied to industries that are no longer relevant or may require significantly more time than previously anticipated to become relevant. Further, the current market cycle is different from other dark clouds in that extremely elevated inflation imposes headwinds on both households and business communities. Therefore, you must pay attention to the below growth stocks to avoid since not everyone can be a winner.
| NVAX | Novavax, Inc. | $58.43 |
| TDOC | Teladoc Health, Inc. | $32.91 |
| GRWG | GrowGeneration Corp. | $5,27 |
| GOEV | Canoo Inc. | $3.64 |
| RBLX | Roblox Corporation | $34.35 |
| RDFN | Redfin Corporation | $10.72 |
| DHI | D.R. Horton, Inc. | $66.52 |
Novavax (NVAX)
One of the biggest beneficiaries of the coronavirus pandemic, Novavax, Inc. (NASDAQ:NVAX) was on life support prior to the global health crisis. Because of the pandemic, however, the company received a second chance, becoming one of the credible competitors to developing a vaccine for Covid-19. However, the company lagged behind big pharmaceutical firms and basically lost out.
It’s a shame too because Novavax deployed a subunit approach, which is a proven methodology used to develop other vaccines. In my opinion, that could have helped those who were vaccine hesitant. Unfortunately, Novavax wasn’t up to the meteoric pace of its competitors and now, the window of opportunity appears to have closed.
According to an April 2022 report by CNN, the coronavirus is no longer a top issue for Americans. Anecdotally, you can probably see that for yourself, with fewer and fewer people wearing face masks. Frankly, NVAX isn’t relevant anymore, meaning that it’s likely one of the growth stocks to avoid.
Teladoc Health (TDOC)
If you take a look at almost every other publicly traded company following the initial onset of Covid-19, they dropped like a rock before eventually skyrocketing higher. Not Teladoc Health, Inc. (NYSE:TDOC). It just kept rising and rising, like a passenger jetliner lifting off. Of course, the reason was obvious: Teladoc and other telehealth companies enabled contactless medical consultations.
At the time, the SARS-CoV-2 virus was a mysterious threat. Personally, I remember watching shocking videos of people stumbling over and apparently dying on the streets, reminiscent of apocalyptic movies and TV shows that have become popular in recent years. So, yeah, I can fully appreciate why someone who had a bump on their rump didn’t necessarily want to see a medical doctor in person.
However, as the aforementioned CNN report revealed, Americans are so over Covid. In fact, the concept of Covid fatigue was already a thing during the summer of 2020. Thus, TDOC lacks the relevance of other public companies, making it one of the growth stocks to avoid.
GrowGeneration (GRWG)
I’m torn on GrowGeneration Corp. (NASDAQ:GRWG) so don’t take its inclusion as one of the growth stocks to avoid as a personal dig on the company. Under normal — as in non-Covid — circumstances, GRWG could be one of the better investment ideas to consider. As the nation’s largest hydroponic store and organic garden center supplier, it has strong ties to the “botanical” sector without being a direct agricultural play, if you know what I mean.
But the main concern I have with GRWG is the black market for cannabis. Obviously, illegal operators don’t pay licensing fees nor taxes. Therefore, they can undercut legitimate market participants, which poses huge challenges. Now, it’s certainly possible that law enforcement can step up and crack down on illegal growers. However, it’s also worth pointing out that police officers have bigger problems to worry about.
Again, I can go either way. However, the screaming inflation rate incentivizes the lower prices of the black market. With cops looking the other way, GRWG faces huge risks, thus it’s one of the growth stocks to avoid.
Canoo (GOEV)
I might get some heat for mentioning Canoo Inc. (NASDAQ:GOEV) because it’s a popular company among contrarian investors. As well, being an upstart electric vehicle manufacturer, it immediately attracts attention. Since I write for a living, I’m well aware that mentioning anything about EVs is liable to bring in heavy traffic. But such rabid enthusiasm can have a dark side as well.
During the new normal, many retail investors appeared to have lost discipline, buying into popular ideas without much due diligence. For Canoo, the fundamental risk is that the EV industry may not be ready for mass consumer adoption. I appreciate what Canoo was attempting here, which was to make EVs accessible to everyday households. But economic realities have been unkind to the company.
Worse yet, Canoo recently revealed that it has cash problems, which is going to make prospective investors skeptical. Already, outside circumstances like Russia’s invasion of Ukraine have specifically hit the automotive sector with the (smelly stuff) stick. So Canoo being unready for a war of attrition makes it one of the growth stocks to avoid.
Roblox (RBLX)
An online game platform and game creation system developer, Roblox Corporation (NYSE:RBLX) enjoyed healthy support when it launched its initial public offering (IPO) last year. With a focus toward family friendly digital fun, Roblox represented a lifesaver for working parents who suddenly had to juggle the unique circumstances and disruptions that the Covid-19 crisis caused.
Shares hit their peak in November 2021 as bullish momentum attempted to hit the $140 price. RBLX didn’t quite get there, though, with subsequent trades turning disastrous. Since the beginning of this year through the May 19 session, the stock has given up almost 56% of market value. While this might seem like a contrarian discount to exploit, you might want to consider RBLX as one of the growth stocks to avoid.
Like the other companies on this list, Roblox has lost some relevance particularly as Covid-19 fears fade. Being cooped up at home for about two years or so, people desire real experiences, leaving video game companies out in the cold.
Redfin (RDFN)
Although I might get heat from real estate experts, I’m not a big believer in the current housing boom. I get that the experts talk about residential unit shortages and what not. However, if housing prices were really supposed to continue jumping higher, how the heck is a company like Redfin Corporation (NASDAQ:RDFN) down 71%? Such a contrast between biased expert voices and free market dynamics is troubling.
Personally, I’m on the side of the free market. While the masses can sometimes be irrational, I’m not sure if they’re irrational to the point where they would succumb a truly viable business to a 71% market loss. More importantly, the fundamentals point to a stark reality where households in major metropolitan areas are paying much more of their income toward core living expenses than in prior years.
For instance, in the years leading up to the Great Recession, households might pay 25% of their income to rent or mortgage payments. My analysis suggests that this metric is now 40% or greater. With inflation continuing to cut away at family budgets, the housing boom seems suspect. Therefore, RDFN is one of the growth stocks to avoid.
D.R. Horton (DHI)
On paper, D.R. Horton, Inc. (NYSE:DHI), billed as America’s largest homebuilder, seems to be a candidate for a publicly traded company to invest in. After all, we’ve been inundated with news that there’s a housing shortage in the U.S., that we’re down three or four million units. So, the answer is build more homes.
Well, if it was that easy, DHI should rise exponentially. Yes, supply chain issues pose problems but with a market this hot, you should easily be able to pass down costs to buyers. Thus, it’s awfully curious that DHI is down 35% YTD. Something to invest in? More like one of the growth stocks to avoid.
But what about the housing shortage argument? If you drill down into the numbers, this notion could be a myth or at least misguided. Based on an analysis of likely homebuying candidates, the ratio between this population group and total housing units is historically elevated.
Under this framework, it’s not too surprising why DHI is struggling. If the company overbuilds, it runs the risk of overshooting demand — just like it did during the last housing crisis.
On the date of publication, Josh Enomoto 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.