3 Falling Knife Stocks to Avoid

stocks to avoid - 3 Falling Knife Stocks to Avoid

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In this bull market, particularly in the last few years, stocks to avoid generally have stayed stocks to avoid. And stocks to buy, even after big gains, have stayed stocks to buy. For the most part, winners have kept winning, while losers have stayed stuck at best.

That trading does make some sense. The world is changing rapidly for many reasons. And change is a double-edged sword. As just one example, the growth of cloud computing unquestionably has been a boon for the likes of Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). It has been a headwind for software developers like Oracle (NYSE:ORCL) and hardware manufacturers like IBM (NYSE:IBM).

The companies set to benefit from these changes thus get bid ever higher, particularly with investors still piling into U.S. equities. The companies fighting those changes face constant challenges that hover over their stocks. Investors will pay handsomely for the streaming growth offered by Netflix (NASDAQ:NFLX). They have sold the likes of ViacomCBS (NASDAQ:VIAC,NASDAQ:VIACA) and AMC Networks (NASDAQ:AMCX), who may well struggle in that new environment.

And so for years now, buying a stock simply because it’s “too cheap” has been a recipe for losses, if not disaster. The same is true of stocks “on sale” after big declines. For these three stocks, those cases apply. But here, too, the arguments seem thin, and even after declines these names remain stocks to avoid, not stocks to buy.

Aurora Cannabis (ACB)

3 Falling Knife Stocks to Avoid
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It’s possible that cannabis producer Aurora Cannabis (NYSE:ACB) will see a bounce in 2020. Along with other cannabis names, ACB stock has stabilized somewhat of late: shares are flat over the past month. “Cannabis 2.0” products can boost the sector. Valuations have come in dramatically: Aurora stock, for instance, has lost 72% of its value over just the past year, and is down about 85% from October 2018 highs. Cannabis stocks recovered early last year from a late 2018 sell-off, and the group could find some buying in 2020 as well.

But it’s just as possible — and more likely — that ACB stock will keep falling. The company’s balance sheet remains a pressing concern. Even if near-term bankruptcy risk remains moderate, Aurora lacks the balance sheet flexibility of fellow majors Canopy Growth (NYSE:CGC) and Cronos (NASDAQ:CRON). The company still is burning cash, and with over a billion shares already outstanding and a stock price below $2, further stock issuances to raise capital will only add to the selling pressure on the stock.

Because of that share count, Aurora Cannabis stock isn’t nearly as cheap as a sub-$2 share price suggests. The company still has a market capitalization well over $2 billion. Shares certainly can get cheaper, and even if cannabis stocks do manage to rally in 2020, it’s not hard to find better choices elsewhere in the sector.

Canada Goose (GOOS)

3 Falling Knife Stocks to Avoid
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Shares of Canada Goose (NYSE:GOOS) have fallen out of the sky. With a 7% decline Friday as of this writing, shares now have declined 18% in 2020 alone. They’re down almost 60% from November 2018 levels.

There’s admittedly an intriguing case to step into the dip. Current analyst estimates for fiscal 2021 (ending March) suggest EPS of $1.59, and a forward price to earnings multiple under 20x. Coronavirus fears are pressuring the stock at the moment, given that China was expected to be a key growth market for Canada Goose. Should those fears ease, GOOS has a chance at a snapback rally.

But there’s more going on here than just near-term worries. At least one analyst has pointed to elevated markdowns, which raises worries about the company’s pricing power and brand quality. There are worries that the company’s enormous spike in sales in recent years is something of a fad: after all, this isn’t a new company, but rather one founded back in 1957.

Even from a near-term standpoint, there’s little sign of a catalyst. Earnings estimates likely will be revised lower amid current worries. And GOOS has an ugly stock chart at the moment. Indeed, GOOS stock is a classic falling knife — a term used for a stock that is very dangerous to try and catch.

Carrols Restaurant Group (TAST)

3 Falling Knife Stocks to Avoid
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Small-cap Carrols Restaurant Group (NASDAQ:TAST) has an interesting business model. The company began in the 1960s as a restaurant operator before converting its locations to the Burger King banner in 1976. After going private in the 1980s, Carrols went public again in 2016 and six years later spun off two acquired concepts into Fiesta Restaurant Group (NASDAQ:FRGI).

Three weeks later, Carrols executed an enormous acquisition of Burger King restaurants from corporate owner Restaurant Brands International (NYSE:QSR). Since then, Carrols has made many more, if smaller, deals, often buying out Burger King franchisees as they neared retirement. Carrols now is far and away the biggest Burger King franchisee, while its acquisition of Cambridge Franchise Holdings last year added 55 Popeye’s locations to its portfolio.

TAST stock has plunged of late despite that growth. But the problem is that the 70%-plus decline from 2018 highs may be coming precisely because of that growth. Carrols keeps buying out franchisees, yet that growth has done nothing for free cash flow. Spending on acquired restaurants has swamped the operating cash flow created: the company has burned nearly $60 million over the past eleven quarters, even before the $131 million in cash spent in the Cambridge deal.

In other words, there’s a real chance the operating model here just doesn’t work. And with Burger King sales stumbling despite the introduction of the Impossible Whopper, there’s even more pressure on Carrols’ results. Carrols simply has real problems, and it’s hard to see how they get fixed and how TAST stock can recover from its current seven-year low.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2020/02/3-falling-knife-stocks-to-avoid/.

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