Until recently, the markets looked unstoppable. But of course, things can changed fast, as stocks have come under pressure. And this can certainly make it tough for those planning their investment for retirements.
With interest rates rising, there has been a rotation away from high-growth stocks to those that are likely to benefit from the world’s reopening. Besides, there are a large number of stocks that have valuations that are stretched — even after the recent sell-off.
Now when these types investments start to fall, the downside can be particularly steep. This is fairly normal when the “bubble” pops.
In light of this, what are some of the stocks to avoid now in your retirement portfolio? Well, let’s take a look at seven:
- GameStop (NYSE:GME)
- Tesla (NASDAQ:TSLA)
- Alibaba Group (NYSE:BABA)
- Rocket Companies (NYSE:RKT)
- DoorDash (NYSE:DASH)
- AMC Entertainment Holdings (NYSE:AMC)
- Lemonade (NYSE:LMND)
Retirement Stocks To Avoid: GameStop (GME)
Of course, GameStop has become one of this year’s hottest stocks. The shares went from $19 at in early January to a high of $483. Then after a big drop off, the shares have since gone on to pull off a big rally. GME stock is now trading at $120 and the market capitalization is a hefty $8.39 billion.
It’s true that there are some positives. The reopening of the U.S. economy will be a boost and there continues to be strength in the gaming markets. The company has also been cutting back its costs and has the backing of Ryan Cohen’s venture capital firm. He is the founder of Chewy (NYSE:CHWY) and will bring expertise with the e-commerce strategy.
But despite all this, the fact is that GME stock is facing some tough challenges as well. With the move toward cloud-based games, there is less need for brick-and-mortar locations. In fact, from fiscal 2012 to fiscal 2019 — before the pandemic hit — revenues went from $9.6 billion to $6.5 billion.
And finally, the valuation of GME stock is a nose-bleed levels. According to TipRanks, Wall Street analysts are estimating that the downside potential is 90%!
Elon Musk is known for disrupting markets. He did this with PayPal (NASDAQ:PYPL), as the company has become the dominant player in electronic payments.
But the biggest play, of course, for Musk has been Tesla. He has upended the massive auto industry by focusing on electric vehicles, innovative distribution and advanced technologies like AI.
Yet there is a nagging issue: The competition is catching on and gaining momentum. If anything, Musk has provided a playbook for his rivals!
Look at Ford (NYSE:F). The company has been able to get lots of traction with its Mustang Mach-E electric SUV. Since the launch last year, it has gained an impressive 12% of the EV segment in the U.S.
Then there is Volkswagen. Consider that the company has become the leader in EVs in Europe. The company is doubling down on an all-electric personal transportation future, Barron’s noted earlier this week.
Note that the competition will only get more intense — and this could easily weigh on TSLA stock. This is especially the case since the valuation is already stretched, with the shares trading at 24 times revenue.
Alibaba Group (BABA)
Alibaba has been able to successfully pursue various huge market opportunities in China. The company has a dominant position with its e-commerce marketplaces and the cloud business has been making significant strides. There has also been success with the entertainment and video platforms.
But the growth could come under pressure. And the reason is the changing politics in China. President Xi Jinping appears to be getting concerned about the power of tech giants like Alibaba and he is taking action.
For example, the government is looking at potential fines as well as requirements to help with government initiatives. Although, perhaps the biggest risk is that there will be restrictions on the business practice, including potential divestitures (the Chinese government has already asked Alibaba to unload entertainment assets). All in all, this could allow competitors to get an edge.
The result is that there will be much more uncertainty for BABA stock and this could limit the upside.
Rocket Companies (RKT)
Rocket Companies, which is the largest U.S. mortgage lender in the U.S. and operates Quicken Loans, pulled off its IPO in early August. The shares were offered at $18 and jumped 20% on the first day of trading. They have since logged a gain of 28%.
The company is highly profitable and as been growing at a rapid pace. The company even recently issued a one-time special dividend of $1.11 per share.
But the growth could easily slow down. With rising interest rates, there is likely to be muted growth for mortgage issuances and refinancings.
Wall Street analysts also think RKT stock is fully valued. Based on the consensus price targets, the upside from current levels is only about 8%.
DoorDash, which is the leading peer-to-peer delivery service, launched one of last year’s top IPOs. The company raised about $3.37 billion and DASH stock soared 86% on the first day of trading.
Founded in 2013, Door Dash has been a high-growth company from the start. But last year saw a major acceleration. With the Covid-19 pandemic, restaurants had to scramble to provide home delivery. During the latest quarter, revenues tripled to $970 million from about $300 million in the same period a year ago.
Yet it will likely be tough for DoorDash to keep up the growth ramp. With the rollout of the vaccines and the reopening of the U.S. economy, it seems likely that consumers will quickly shift to restaurant dining. Besides, home delivery is not necessarily cheap either and the market is seeing more competition, such as with Uber (NYSE:UBER) and Grubhub (NYSE:GRUB).
And with the valuation already a high levels, there could easily be considerable downside risk with DASH stock. According to TipRanks, the estimate is for a decline of 31%.
AMC Entertainment Holdings (AMC)
Late last year, the prospects for AMC looked grim. There was even the possibility of a bankruptcy filing.
But the company’s management was able to raise enough capital to stay afloat. And yes, in the new year AMC stock became a Wall Street darling. A big part of this was due to the buying from the Reddit investors.
With the reopening of the economy, AMC will definitely see a nice pick-up in business. But then again, it does look like much of this is already factored into the stock price. According to TipRanks, the consensus price target for AMC stock is $4.88, which reflects 64% downside from current levels.
The company also has a high debt load, at 8.3 times 2022 forecast EBITDA (earnings before interest, taxes, and amortization). Then there is deferred rent of $450 million, which will need to be paid back. That will will a headwinds for profits.
Founded in 2015, Lemonade is a next-generation insurance company that leverages AI and machine learning for better policy matching and pricing. The company primarily targets the millennial generation.
While growth has been strong, the revenue base is still fairly small. In the latest earnings report, sales came to $20.5 million.
But the valuation on LMND stock is far from small! Consider that the market capitalization is a hefty $5.4 billion.
Note that some Wall Street analysts are quite bearish on the company. Just look at Bank of America’s (NYSE:BAC) Joshua Shanker. He recently noted: “Lemonade’s guidance of $372-378mn in premium in-force seems aggressive … It is plausible that Lemonade could hit its target if it ramps marketing spend, but we believe such growth would be acquired a cost far higher than the lifetime value of the policies/customers.”
His price target on LMND stock is $29, which assumes 67% downside from current levels
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.