Faced with significant headwinds, investors may want to target certain stocks to avoid to prevent catastrophic loss. Primarily, the media focused on the implosion of SVB Financial (NASDAQ:SIVB), with regulators appointing the Federal Deposit Insurance Corporation (FDIC) as receiver, which will then dispose of the beleaguered firm’s assets.
However, SVB Financial may be a canary in the coal mine for other banking firms, setting the stage for stocks to sell. In particular, many financial institutions levered themselves to risk-on categories such as startups or cryptocurrencies. In so doing, they’re not suffering from a cash crunch as several economic segments incur demand erosion.
Even more problematic, the Federal Reserve may end up raising interest rates. Indeed, inflation remains stubbornly high due to a robust labor market (tech sector layoffs notwithstanding), leading to more dollars chasing after fewer goods. Almost invariably, then, benchmark rates must move higher to cool rising consumer prices. And that translates to a discussion of stocks to sell. It’s an ugly situation. With no easy solutions in sight, these are the stocks to avoid.
| FRC | First Republic | $31.21 |
| HIVE | HIVE Blockchain | $2.71 |
| MARA | Marathon Digital | $6.70 |
| DM | Desktop Metal | $2.17 |
| WETG | WeTrade Group | $0.33 |
| ASTI | Ascent Solar | $0.46 |
| BBBY | Bed Bath & Beyond | $1.24 |
Stocks to Avoid: First Republic (FRC)
Although it’s bad form to kick a man when he’s down, with First Republic (NYSE:FRC), investor protection must come first. Therefore, despite management’s reassurances that everything’s fine, I’m still going to peg FRC as one of the stocks to avoid if you’re looking for a viable discount. However, if you already own FRC, you might want to consider it one of the stocks to sell.
Look, the reality is that people are panicked. With rising interest rates that might go even higher, the market’s liquidity has become extremely constrained. Moreover, the rise in interest rates means that several financial institutions may have unrealized losses in their bond portfolios. Finally, with venture capital drying up, troubled enterprises must tap into their cash reserves.
Potentially, these circumstances make for a perfect storm. I hope I’m wrong – dead wrong. However, if investors are freaked out, it’s because they have good reason to be. Unfortunately, I cannot in good conscience state that FRC is a buy. Therefore, I must consider it one of the stocks to avoid.
Stocks to Avoid: HIVE Blockchain (HIVE)
With the theme of catching risk-on assets with their pants down dominating global business media outlets, investors need to be careful about HIVE Blockchain (NASDAQ:HIVE) and its ilk. As investors rush out of treacherous financial categories and toward high-quality names, cryptos will likely struggle. In my opinion, virtual currencies represent the purest of risk-on-asset classes. Financially, it’s difficult to justify exposure to HIVE, making it one of the stocks to avoid. True, at the moment, its three-year revenue growth rate stands at 108.5%. As well, its book growth rate during the same period pings at 136.8%. But that’s with the benefit of an extraordinary bull run in blockchain assets.
Moving forward, Hive must deal with a terrible situation with its profitability (or lack thereof). I can understand when operating and net margins sit deep into negative territory for aspirational startups. However, when gross margins are also deeply in the red, this dynamic presents severe viability concerns. As well, the Altman Z-Score of 3.39 below breakeven indicates a distressed enterprise. It’s one of the stocks to sell until positive momentum returns to cryptos.
Stocks to Avoid: Marathon Digital (MARA)
Given that the cat is out of the bag regarding digital assets, investors should consider Marathon Digital (NASDAQ:MARA) as one of the stocks to avoid. To be sure, it’s a sad situation. During the early stages of the crypto sector’s bull run, Marathon provided great (albeit speculative) opportunities. However, now that the segment may encounter a long winter, it’s probably best to stay away.
Financially, Marathon presents an extremely troubled outlook. For one thing, Gurufocus.com warns that MARA may be a possible value trap. Looking at its balance sheet, it’s difficult to argue against that point. Frankly, the company carries too much debt relative to its cash load. Also, its Altman Z-Score is 0.22 below parity, indicating distress and high bankruptcy risk over the next two years. If that wasn’t enough, the profitability picture presents a dire framework. As with Hive Blockchain above, it’s not just about the terribly negative operating and net margins. Rather, the gross margin also sits deeply in the red zone. Therefore, investors should consider MARA as one of the stocks to avoid.
Desktop Metal (DM)
At first glance, Desktop Metal (NYSE:DM) doesn’t seem like a natural candidate for stocks to avoid. For example, since the Jan. opener, DM gained a blistering 54% in equity value. As well, it’s a technology firm, tied to the relevant field of manufacturing 3D printing systems. However, a wider context reveals that in the trailing year, DM hemorrhaged 48%. That doesn’t happen for a reason (usually a bad one).
Financially, Desktop represents a major liability given the circumstances. Yes, I’ll grant that Desktop features an impressive three-year revenue growth rate of 77.9%. As well, its book growth rate during the same period stands at 32.7%. However, these stats incorporate the heyday of speculation during the first two years of the coronavirus pandemic. Moving forward, under a higher interest-rate environment, circumstances don’t look hot for Desktop. Mainly, its fiscal stability is questionable, with an Altman Z-Score of 3.1 below parity. In addition, it suffers from deeply negative operating and net margins. If you’re not a gambler, DM ranks among the stocks to sell.
WeTrade (WETG)
Based in China, WeTrade (NASDAQ:WETG) flashed as one of the technology firms that features a probability of financial distress of 70% or higher, according to Gurufocus.com’s screener. Unlike Desktop Metal above, WeTrade presents an ugly framework from the get-go. For starters, WETG trades hands at 36 cents at the time of writing.
Beyond that, it lacks credible performances in the charts. Since the January opener, WETG slipped 8%. In the trailing 365 days, the security gave up over 90% of its equity value, a stunning loss. Therefore, it easily ranks among the stocks to avoid for anyone, not an extreme gambler. To be fair, WeTrade enjoys a very strong balance sheet, mainly because it’s unencumbered with debt. However, it lacks operational rigor. For instance, in the trailing-12-month (TTM) period, WeTrade posted $12.32 million in revenue. However, in 2021, it posted $14.38 million.
Compounding matters, WeTrade lacks a clear path to profitability. Sure, its gross margin pings near 36%. However, its operating margin sits at 57% below breakeven. Its net margin rates are slightly worse at 59% below zero. Therefore, WETG is one of the stocks to avoid.
Ascent Solar Technologies (ASTI)
Taken at face value, it’s tempting to want to give Ascent Solar Technologies (NASDAQ:ASTI) a chance. A photovoltaic specialist, Ascent obviously carries significant implications for the solar energy industry. Further, with society gravitating toward clean and renewable energy solutions, ASTI’s underlying narrative enjoys extraordinary relevance.
Unfortunately, a good narrative can only take an enterprise so far, as Ascent discovered. Since the January opener, ASTI dropped a staggering 72% in equity value. Frankly, with fewer than three months into the new year, it’s over: ASTI simply represents one of the stocks to avoid. If you want more confirmation, in the trailing year, it’s down almost 96%.
Not surprisingly, Gurufocus.com warns that Ascent Solar is a possible value trap – no kidding. Glaringly, its three-year revenue growth rate sits at 90.3% below parity. At this point, I’m just writing to make up the minimum word count. Profit margins slipped to ridiculously negative rates while the balance sheet has become a mess. It’s one of the stocks to sell.
Bed Bath & Beyond (BBBY)
For short-term traders that want to gamble against the bears, Bed Bath & Beyond (NASDAQ:BBBY) offers a tempting proposition. Last Friday, BBBY stock jumped 9%. To be fair, it’s not just empty speculative fervor driving the underlying retailer. On the brink of bankruptcy, management secured roughly $1 billion in financing to save the enterprise.
Still, the overall narrative presents a hideous picture. Deeply indebted, Bed Bath & Beyond lacks flexibility if the economy slips into recession. Unfortunately, with the Fed and hotter-than-expected jobs reports all but signaling more rate hikes ahead, a recession may be inevitable. Plus, the retailer specializes in discretionary and competitive segments. In other words, it’s not the only game in town amid belt-tightening behaviors.
Further, the company represents one of the dubious enterprises with negative three-year revenue growth rates. As well, its book growth rate during the same period is also deeply negative. To no one’s shock, the company also suffers from negative profit margins. Unless you have a compelling reason to believe in a turnaround, BBBY’s one of the stocks to avoid.
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.