With the market in correction mode and investors abandoning growth stocks in droves due to inflation fears, there are many beaten-down stocks right now, particularly in the tech sector.
But history shows what looks like “the sum of all fears” nearly always turns out, in the long run, not to be a very big deal. Among the huge crises from which the market ultimately fully recovered in the last 65 years are the Cuban Missile Crisis, the out-of-control inflation of the 1970s and early 1980s, the crash of 1987, the Great Financial Crisis, and, of course, the Covid-19 pandemic.
During the last two crises, many intelligent people truly believed that the world, if not coming to an end, would take tremendous hits from which it would not recover for many years, perhaps decades. But ultimately, after relatively short periods of time, the world and the markets bounced back.
So, I have little doubt that the market will bounce back fairly soon from the crises that are currently keeping it down. As a result, many beaten-down stocks with strong fundamentals and/or powerful competitive advantages will make huge comebacks.
On the other hand, however, beaten-down stocks with weak fundamentals and/or no meaningful competitive advantages will keep falling even after the major market indices recover. Those are, obviously, the names that all investors should sell.
Image of a Workhorse (WKHS stock) logo and drone on the side of a truck.
Source: Photo from WorkHorse.com
In an Aug. 25 column on WKHS stock, I wrote that “even the best leaders cannot transform a badly lagging team or a company with no real competitive advantages and crucial weaknesses into a winner in six months or even a year.”
With its allegedly malfunctioning prototype, reports that more than one of its customers has been dissatisfied with its products, and large-scale recalls, Workhorse is definitely “a company with no real competitive advantages and crucial weaknesses.” And as I pointed out in my August column, its new Chief Executive Officer (CEO) Richard Dauch has a great deal of experience in the auto sector, but he is far from a turnaround specialist.
What’s more, in November 2021, The Wall Street Journal reported that both the U.S. Securities and Exchange Commission and the U.S. Department of Justice had launched probes into the company. Nor has Workhorse shown much evidence since August 2021 of being on the comeback trail.
Yet, despite all that, the shares’ market capitalization is still over $500 million, meaning that they continue to have a great deal of room to tumble.
Block (SQ)
Square, Inc. changes name to Block (SQ). Smartphone with Square logo on screen in hand on background of Block logo.
Source: Sergei Elagin / Shutterstock.com
As I’ve written in multiple past columns, Block is facing tough competition from numerous, strong firms, including PayPal (NASDAQ:PYPL) and Shopify (NYSE:SHOP). What’s more, Apple (NASDAQ:AAPL) could also be getting ready to go head-to-head with Block, and Zelle, a digital banking system created by large, legacy banks is also battling Block for market share. Block does not seem to have any clear-cut advantages over any of these competitors.
Additionally, the company’s fourth-quarter (Q4) results featured negative operating income and unimpressive margins. Further, likely due to Block’s intense competition, its sales and marketing costs are growing by leaps and bounds. Finally and astoundingly, a majority of the company’s total Q4 revenue was derived from Bitcoin transactions.
So, the recent weakness of Bitcoin (BTC) does not bode well at all for SQ stock. Also ominous for the shares, history suggests that Bitcoin tends to drop when government stimulus is withdrawn, and the U.S. Federal Reserve is getting ready to end its asset purchases.
Like Block, DraftKings has a long list of tough competitors, including major casino owners MGM (NYSE:MGM) and Caesars (NASDAQ:CZR). Unlike Block, DraftKings does not have a very large net cash position or any sort of cash flow that will allow it to painlessly keep up with the “big boys” when it comes to sales and marketing.
In fact, its net cash position as of the end of last quarter was less than $1 billion and its operating income in 2021 was negative $1.56 billion.
Meanwhile, in the short- to medium- term, the company is likely to be meaningfully hurt by the delay of Major League Baseball’s 2022 season due to a lockout by MLB’s owners. Finally, it does not have nearly as much access to big-time gamblers as the casino owners with which it is competing. As a result of these factors, elevated customer acquisition costs are weighing heavily on its profitability.
Given these points, I expect the company’s market share, which impresses some analysts, to erode over the medium- to long-term.
Palantir (PLTR)
A close-up shot of a hand on a screen with the Palantir (PLTR) logo.
Source: Ascannio / Shutterstock.com
Even the company’s longtime promoter and defender, Cathie Wood, appears to have given up on PLTR stock. Late last month, the famous fund manager “dumped 11.76M shares of the stock.” And from Feb. 17 to Feb. 22, Wood unloaded a huge 30 million shares of the company.
Wood’s share sales came after I expressed skepticism about her rationale for owning the stock in a number of columns. I’ve also questioned the extent to which Palantir’s technology is superior to other makers of data-analysis companies, warned that it had lost some important clients, and noted that, factoring in its huge share-based compensation, it was generating huge losses.
Meanwhile, Wall Street was unimpressed with the company’s Q4 results, which featured lower-than-expected earnings per share (EPS). Additionally, Palantir has been accused of essentially buying business from multiple special purpose acquisition companies (SPACs).
Despite all of these issues and the shares’ huge retreat over the last six months, the trailing price-to-sales ratio of PLTR stock is still 14, meaning that the shares can still slide much further.
Beaten-Down Stocks: FuboTV (FUBO)
The fuboTV mobile app icon is seen on an iPhone.
Source: Tada Images / Shutterstock.com
For many months, I’ve warned that this company will have trouble continuing to attract high numbers of cord cutters. That is because its prices are around the same as cable subscriptions and most cord cutters are looking to pay meaningfully less for their TV content than what cable charges.
So, I’m not surprised that the company’s Q4 EPS came in below analysts’ average estimate, while JPMorgan (NYSE:JPM) downgraded the stock to “neutral,” warning that its subscriber growth is poised to decelerate this quarter.
Moreover, like Block and DraftKings, Fubo’s marketing and sales expenses are soaring as it seeks to keep up with much bigger companies. In Q4, its sales and marketing expenses climbed over 125% year-over-year (YOY) to $142 million. Also boding poorly for FUBO stock was the nearly 300% YOY increase in its “subscriber related expenses,” which includes the money it pays for content. It spent $593 million on those expenses last quarter, versus the $564.4 million that it obtained from subscription fees.
As a result, its Q4 loss, aside from “one-time items,” more than doubled YOY, reaching $231.7 million.
For many months, I’ve warned that Fubo would likely have great difficulty competing in online gambling with the major players in that sector. Now, according to Seeking Alpha, Fubo’s “management does not expect it [to] compete with the likes of Draftkings […] or others.”
FUBO stock currently has a fairly low price-sales ratio, but since the company’s market capitalization is around $1 billion, I still expect it to drop much further.
Peloton (PTON)
Peloton (PTON stock) sign on city storefront
Source: JHVEPhoto / Shutterstock.com
As the kids say, this company is a “hot mess.” In many respects, it has fallen a long way from its glory days during the first year of the pandemic.
Meanwhile, fears of the coronavirus continue to lessen with each passing week. Consequently, many consumers will return to gyms, causing them to pass on Peloton’s expensive products. Indeed, the exercise bike maker on Feb. 8 lowered its fiscal 2022 sales guidance to $3.7 billion to $3.8 billion from $4.4 billion to $4.8 billion.
And Peloton certainly has its share of competitors. It has been mentioned as a potential takeover target. But I believe that no one would buy this troubled company for much above “fire sales” prices. And with the shares market capitalization still around $7 billion, it is a long way from those levels.
Beaten-Down Stocks: Robinhood (HOOD)
Robinhood stocks: app logo seen on smartphone on US dollar banknotes
Source: mundissima / Shutterstock.com
This online stock broker has two of the same problems as Block. Specifically, Robinhood is facing very tough competition and its results are tied to the falling cryptocurrency knife.
Unlike Block, however, Robinhood’s results are also closely linked to equities in general and “meme stocks” in particular. With both weakening a great deal in recent months, the company’s Q1 earnings are probably going to be quite unimpressive. In fact, already in Q4, the company’s equities revenue sank 35% YOY.
Most meme stocks have poor fundamentals and/or valuations that are still unreasonable. Additionally, demand for them will probably be meaningfully curtailed by the elimination of the U.S. Federal Reserve’s asset purchases. Consequently, Robinhood’s equities revenue is likely to drop much further in upcoming quarters.
And as I pointed out in recent columns, Robinhood will probably be victimized by meme stock drops, leading more investors to stop buying equities. The latter trend, in turn, will cause more declines in meme stocks, starting the cycle again.
Despite all these issues, the price-to-sales ratio of HOOD stock is 3.15, meaning that it can still tumble a great deal.
On the date of publication, Larry Ramer held a long position in MGM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
