Whatever opportunity there is in any individual stock, it has to happen inside the confines of the collective market. Therefore it is important to examine the realities that we currently face. The virus infection rates are still too high. People and governments are ramping up their lockdown initiatives. I live in Southern California and I can’t even get a haircut. Such conditions should not inspire record stock prices, yet that is what we have. To ready a portfolio, it is important to identify stocks to avoid in case of an event.
It’s during times like these when it’s important to be cautious. That doesn’t mean shorting the market outright, but it would be wise to book some profits. We can always re-buy on dips. It’s also a good idea to buy a few insurance positions. For that, the options markets offer easy fixes.
I know what some of you are thinking: “stocks are not going to fall so, I don’t need insurance.”
None of us actually forecast our own car crashes, yet we pay our premiums anyway. This isn’t different — except that here, it’s even easier to protect. If I buy puts to hedge a bullish portfolio, I can change my mind and sell it back out for partial gains or losses. Try asking for your money back on last month’s auto insurance coverage. I bet Flo would hang up the phone on you.
One thing I can do when I want to be cautious is avoid stocks that are iffy. Today I share three tickers that I would sell at least through the summer. I don’t hate them, but I do think they carry special circumstances that could be troublesome. In fact one of them was part of my picks for 2021 upside surprises. But recent developments caused me to boot it out of the portfolio.
This is where I remind you that I am not calling for a market top. The point is to highlight stocks to avoid so to eliminate the silly losses from vulnerable tickers. They are:
Stocks to Avoid into 2021: Zoom (ZM)
Zoom stock was one of the stars of 2020. While the pandemic demolished the earnings of most companies, Zoom soared to new heights. The quarantine turbo-charged the use of its platform. People couldn’t get out of their homes, so they resorted to the next best thing. We’ve all had a few Zoom meetings, birthday, graduations and family gatherings. The increase in user metrics was exponential, and that was a tangible reason to buy up the stock.
The exuberance lasted for months, but today I am sharing my concern about timing. I am in no way discounting the good work that Zoom management is doing. What worries me is a misalignment between investor expectations and the earnings reports. In the second earnings report of 2021, Zoom stock will begin being compared to performances from last year that included the pandemic effect.
There is a good chance that investors will not be ready to see flat-to-down user metrics.
I actually like the fundamentals of the company, especially if they expand into telephony. They succeeded in growing their user base, so now they can monetize them any which way they want. That is a strategy that has worked well for Facebook (NASDAQ:FB) and Amazon (NADAQ:AMZN).
Fundamentally, Zoom stock is definitely not cheap but I don’t mind that anymore. It carries a 250 trailing price-earnings ratio and a 54 price-to-sales. Mind you, this is a huge improvement over last year’s 115 P/S.
I also like the chart because it shows the potential of a big upside swing to reclaim $500 per share. But for this opportunity in Zoom stock to start, buyers need to get above $385 then $411 per share. I believe these are two tough zones that have potential sellers.
The elevation of the indices also adds another layer of risk. If we do get a correction, this is a knife I’d catch. Meanwhile, to be long it now, I would rather use options. There I can risk a lot less or even create income out of thin air. By selling the Zoom August $260 put, I would collect a $20 credit. In return, I have the obligation to buy the shares at a 30% discount. Breakeven on that is $240 per share.
Micron stock was a huge winner last year. Against all odds, it is up more than twice the S&P 500. It is unusual for it to get this much love. I remember a time in 2019 when I was long it under $30 and the experts were still calling it a value trap. At that time, its price-to-earnings ratio was under 3. Now its P/E is 10 times as big and investors are still chasing it higher.
Management recently reported earnings and the knee-jerk reaction was for the stock to rage upwards.
Last June I wrote about it being a better buy near $42 and the stock fell exactly to it before exploding higher. I’ve traded well before and I don’t want to be long here.
In his interviews, Micron CEO Sanjay Mehrotra expressed tremendous excitement about being in the “sweet spot” of their industry. He also cited all the reasons for great things to come. I contend that investors have already priced all the potential many times over. If things are so great, then where are the results? The chart I shared shows the dislocation between the stock price from the actual returns. Don’t take my word for it just look at their profit and loss statement.
There is absolutely no evidence of improvement — in fact, revenues have shrunk since 2018. Gross profit and net income also fell 18% and 25% respectively. It’s a case of an executive overly selling his company’s progress. This is similar to what I have seen from IBM (NYSE:IBM) for years. The least I can do is not allocate any of my risk to it.
In addition, the Micron stock chart does not inspire an obvious point of entry. I don’t mind the fundamentals, but only after a big pullback. There are several layers of support, but the one that sticks out is near $70 per share. For those looking to be bullish MU stock now, I suggest learning how to sell puts to create a buffer. This would eliminate the immediate risk to loss.
The alternative to owning shares is to sell the Sep $65 put and collect $5 for it. This trade doesn’t even need a rally to win. In fact, the stock can fall 18% and the investor would retain their maximum gains from it. The breakeven point of this trade is $60 per share.
Just a few weeks ago, Twitter stock was one of my long-term picks for 2021. I thought Twitter had the opportunity to leap higher after it recently made a few acquisitions aimed at monetizing its stagnant user base. So far, growing that number has not been their forte. In fact, compared to the booming metrics of most other social media companies, Twitter’s efforts have been a complete failure.
I do give management some credit for growing their gross profits and revenues by 25% since 2016. But even that is still miles behind the rate of growth of, say, Facebook and Pinterest (NYSE:PINS). PINS tripled their gross profit revenues for the same period.
But this week’s headlines caused me to flip bearish, and I booked my profits in Twitter stock. I rarely react to headlines, but in this case they directly hit my active thesis.
My reason to be long revolved around monetizing their users. That thesis is dead if management is actively endangering 20% of their users. The crusade they are on with regards to President Donald Trump’s account and his fans has tangible consequences. As much as 19% of adult Americans’ Twitter accounts followed “@realDonaldtrump.” The primary function of management is its fiduciary responsibility to its stakeholders. Creating a skirmish that could alienate almost 20% of their target audience goes against that fiscal responsibility. Companies should not get political because not all can pull it off like Nike (NYSE:NKE).
In this case, them chasing righteousness does not serve my theory for profits. There is a longer-term opportunity that I would entertain, but I first would need a few things to happen. I would buy the dip closer to $40 per share in order to ride a much bigger upside opportunity. The chart above shows it and how it could develop.
A breakout above $56.50 would also be a buyable strategy that could deliver $10 of upside. My ongoing thesis is dead but I’m open to trading either the dip or the rip. However, for now, it belongs in a group of stocks to avoid owning.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.