In 2022, the stock market has faced a plethora of negative factors, from the Russian invasion of Ukraine and the soaring energy prices that followed to the historic high inflation, the shift in the monetary policy by the Federal Reserve and now the danger of a recession. Given all this, in addition to finding good stocks to buy, you need to be culling your portfolio of stocks to sell.
The major stock indexes are all in red and investment strategies that favor selling stocks in a weak or bear market has paid off year-to-date.
Selling the following stocks makes sense for any investor analyzing current market conditions. Do not fight the major downtrend — sell stocks with weak fundamentals. It may sound simple, but simplicity is often the best way to participate in stock market movements.
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NeoPhotonics (NYSE:NPTN), the first of my stocks to sell, “is a leading developer and manufacturer of ultra-pure light lasers and optoelectronic products that transmit, receive and switch the highest speed over distance digital optical signals for Cloud and hyper-scale data center internet content provider and telecom networks.”
The stock is up nearly 81% in the past year and about 3% year-to-date. Meanwhile, the firm has had a slowing sales growth trend in the past two years, and in 2021 the revenue growth turned negative at -21.79%.
Its negative net income for the past five years also shouldn’t give you confidence in its business prospects and performance. In 2021 net losses widened to -$40.72 million from -$4.37 million in 2020. The stock is pricey trading at a price/book ratio of 5.56.
The shareholders have also been diluted in the past year, with total shares outstanding growing by 4.2%. All this adds up to a stock to sell until it shapes up.
RVL Pharmaceuticals (RVLP)
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RVL Pharmaceuticals (NASDAQ:RVLP) “is a specialty pharmaceutical company focused on developing and commercializing eyecare and medical aesthetics products.”
Sales growth not only slowed over the past three consecutive years, but it actually turned negative — in 2019, 2020 and 2021 the firm reported a sales growth of -8.98%, -88.43% and-36.96% respectively. The profitability simply does not exist.
There is also now a cash burn problem, as in 2021, the company generated revenue of $17.5 million and burned cash of -$56.51 million. The firm has less than a year of cash runway if the free cash flow trend continues to be that bad.
The price/book ratio of 1.54 does not look cheap, and the price/sales ratio of 2.44 is also supporting this argument.
This high amount of stock dilution makes the valuation of RVLP stock worse.
Wolfspeed (WOLF)
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Wolfspeed (NYSE:WOLF) is a technology company that provides “silicon carbide and gallium nitride (GaN) materials, power devices, and radio frequency (RF) devices based on wide bandgap semiconductor materials and silicon.”
WOLF stock has declined 33% in 2022 and further losses are likely. Its sales growth fails to impress — since 2018, it has vacillated between growing and shrinking. The firm has been losing money for years, and in 2019, 2020 and 2021 net losses were -$57.9 million, -$198.7 million, and -$342.7 million respectively.
This business requires heavy capital expenditures in fixed assets at the expense of free cash flow generation. Indeed, the firm increased its capital expenditures in 2020 and in 2021 significantly and therefore has generated a negative free cash flow of -$258.9 million in 2020 and -$696 million in 2021.
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Tripadvisor (NASDAQ:TRIP) is the next stock to sell, though not the weakest on this list. It’s one of the world’s largest travel guidance and booking platforms. The stock is down nearly 34% in 2022.
The problem with Tripadvisor is that it was profitable before the pandemic back in 2018 and 2019, but in 2020 and in 2021 it reported net losses. Even after a sales growth of 49.34% in 2021 as global vaccine programs and the ending of lockdowns allowed for more travel, the firm could not get back to a net profit. Rather in 2021, it reported a net loss of -$148 million.
Tripadvisor’s net income has been negative the last two years, and while analysts expect it to rebound this year, the high gas prices and renewed surges of Covid may hit the company yet again.
GSI Technology (NASDAQ:GSIT) is “a leading provider of SRAM semiconductor memory solutions.” The stock has lost around 17% in 2022 and is a penny stock to sell for the following key reasons.
First, it follows the pattern of weak sales growth. A company with a weak revenue trend will have very tough times generating profits if its gross margin and operating margin are not high. Also, consistency is of paramount importance, especially in profitability. This firm has only been profitable for only one year in the past five, back in 2019.
The fact that earnings have declined by 47.4% per year over the past five years on average shows the weakness of the business. Why buy this stock with no profitability catalysts? There are better ways to put your cash to work.
Clean Energy Fuels (CLNE)
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Clean Energy Fuels (NASDAQ:CLNE) is in the business of turning organic waste into renewable natural gas which can be used for transportation fuel that reduces carbon emissions.
A decline of nearly 18% year-to-date does mean that it is now time to consider buying the stock. The business concept looks good in theory but the real data shows that there is no strong demand for the product. The company has had three consecutive years of declining sales growth, with the past two consecutive years reporting negative growth.
This low demand for the product has led to net losses being the dominant trend. In 2021 the net loss of -$93.15 million was much higher than the net loss of – $9.86 million in 2020.
The shareholders have been diluted in the past year, with total shares outstanding growing by 5.9%. With very weak sales growth, I’d avoid this one for now.
DigitalBridge Group (DBRG)
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The last of today’s stocks to sell is DigitalBridge Group (NYSE:DBRG), which “is one of the world’s largest digital infrastructure firms investing across five key digital infrastructure verticals: data centers, macro cell towers, fiber networks, small cells, and edge infrastructure.”
Having more than one core business seems good in theory as a diversification strategy. But does it work for this firm? Is the decline of nearly 41% in 2022 justified?
The free cash flow is strong on annual basis but a closer look at the past five quarters tells another story. The company is burning cash now, and for the quarter that ended on March 31, 2022, the free cash flow was a massive -$821.11 million.
In terms of valuation, the price/book ratio of 5.7 is too high signaling a very expensive stock. This is a a penny stock to sell, since the business has become much weaker.
On the date of publication, Stavros Georgiadis, CFA 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.
