It has been a rocky few weeks for the stock market amid concerns that a resurgence in Covid-19 cases would slow economic growth. Moreover, gold prices have also risen in the past few weeks, worrying investors about inflationary pressures. Hence, they are looking to forego riskier investments and avoid catching the proverbial falling knife stocks.
Moreover, as my colleague Josh Enomoto pointed out in his recent article, employment levels are still low, suggesting that “we have fewer people with means to support current rich valuations.” In other words, the market is ripe for those dangerous-to-catch stocks.
What are we talking about here? These are stocks that have experienced a sharp decline in a short period. It is essentially a metaphor used to describe the quick sinking in the price of a stock. You think you’ve caught it near the bottom, only to get injured when it slides further.
Investors need to have an understanding of how to go about such investments. They might wait for the stock price to bottom out, as it could rebound sharply. Here is a list of falling knife stocks worth your analysis now.
- Tesla (NASDAQ:TSLA)
- Dollar Tree (NASDAQ:DLTR)
- Take-Two Interactive Software (NASDAQ:TTWO)
- Penn National Gaming (NASDAQ:PENN)
- La-Z-Boy (NYSE:LZB)
- Clorox (NYSE:CLX)
- Vertex Pharmaceuticals (NASDAQ:VRTX)
Falling Knife Stocks To Avoid: Tesla (TSLA)
Electric vehicle giant Tesla is trading at ridiculous levels and is arguably one of the top sentiment-driven stocks in the market. However, in the past six months, investor have lost 12.8% of their shares’ value. Despite the pullback, TSLA stock’s current price still makes hardly any sense relative to its underlying business despite its profitability.
True, Tesla is the leader in the EV realm, but the mounting competition in the sector will weigh in on its long-term prospects. Its competitors have solid brand equity, and some of them have established their dominance in particular markets. Moreover, a whole host of EV companies will be making the rounds in the next couple of years.
TSLA stock is trading at a dumbfounding 19 times forward sales, something that should have us all scratching our heads over. The bloated valuation is giving in to the weaknesses in the market, which is why the stock has been shedding more of its value in recent days.
Dollar Tree (DLTR)
Discounted goods retailer Dollar Tree did reasonably well to weather the Covid-19 crisis. However, with its lukewarm earnings results and light profit guidance, DLTR stock has taken a hit in the past three months, shedding 9.3%. Returns have been negative and continue to weaken amidst concerns of rising input costs from inflation and competition.
Revenues rose a modest 3% in its latest quarter. Demand for pandemic-related supplies has slowed, however, it has been offset somewhat by sales of discretionary goods. Management guided its earnings to fall in the $5.80 to $6.05 range compared to the $6.20 consensus.
Accelerating cost pressures from freight and wages will continue to weigh in on Dollar Tree, especially in light of its fixed $1 price point, which restricts its ability to absorb high costs through price increases.
Falling Knife Stocks: Take-Two Interactive Software Inc. (TTWO)
Take-Two Interactive is arguably one of the strongest video game publishers with the most powerful proprietary technology in the market. It generated incredible results in fiscal 2021 and has a robust pipeline of video games in the coming years. However, of-late TTWO stock has shed close to 20% of its value due to a delay in two of its top titles.
In its most recent earnings call, chief executive Strauss Zelnick stated that: “For the year, we are reiterating our outlook, as there has been some movement in our release schedule, including two of our immersive core titles shifting to later in fiscal 2022 than contemplated by our prior guidance.”
As a result, its net bookings will be down to $3.2 billion to $3.3 billion versus the consensus of $3.43 billion.
Penn National Gaming (PENN)
Penn National Gaming is one of the leading casino operators in the U.S. Moreover, it has also established a strong presence in i-gaming and sports betting through its investment in Barstool Sports.
The company has delivered tremendous earnings results, posting a 407.1% year-over-year growth in revenues. Despite these results, PENN stock has lost 36.5% of its value in the past six months.
The drop in its price is largely due to the broad-based correction for i-gaming stocks. Between April 2020 and March 2021, Penn stock had shot up by over 900%. Therefore, the current pullback doesn’t seem odd. However, these headwinds will not impact PENN stock for a long time and could recover soon.
Falling Knife Stocks: La-Z-Boy Incorporated (LZB)
Furniture producer La-Z-Boy recently posted blow-out earnings results in its fourth quarter. It showed revenue of $519.5 million, representing a healthy 41% increase from the prior-year period. However, the management’s warnings about supply chain issues and its margin volatility make LZB stock a risky investment in the near term.
LZB stock is down a considerable 17.4% in the past three months. It faces considerable risks regarding high demand levels, production ramp-ups not addressing the backlog and high margin volatility. Management expects these elements to have a negative on its profit margins in the short run.
However, with demand trends looking strong, things should improve drastically in the long run as the company works through its backlog.
Clorox benefited heavily from the obsessive cleaning habits stoked by the Covid-19 pandemic. As a result, sales were at elevated levels for the company throughout last year. However, those tailwinds are fading away as cleaning habits return to pre-pandemic levels. Hence, CLX stock has declined 10.4% in the last three months, even with the delta variant surge occupying the headlines.
Clorox recently reported its fourth-quarter results, where its revenues dropped by 9% on a year-over-year basis. Sales were impacted by an unfavorable price mix but slightly offset by cost-saving initiatives.
Moreover, its health and wellness category was greatly affected by lower shipments of disinfecting and clean products. The company’s full-year revenue is likely to fall in a range of $6.90 billion-$7.19 billion versus the consensus of $7.45 billion.
All that points to a scenario where CLX stock will remain under duress for the foreseeable future.
Falling Knife Stocks: Vertex Pharma (VRTX)
Shares of biotech leader Vertex Pharmaceuticals have been a beating as its pipeline hasn’t produced any big wins off-late.
In June, the company revealed that its second attempt at treating a rare lung disease wasn’t much improvement over the first trial. Therefore, it would be mostly reliant on its revenues from a small population of cystic fibrosis patients.
Then the company announced the discontinuation of the clinical program for VX-864, a treatment for the genetic disorder alpha-1 antitrypsin. This could have been a major revenue generator for the company, considering the market’s void for its testing.
However, despite these challenges, VRTX has a healthy growth runway ahead and could pick up the pace soon.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.