After Federal Reserve Chairman Jerome Powell warned that the Fed could speed up the tapering of its asset purchases, the shares of many unprofitable companies and the stocks of companies with poor fundamentals tumbled. With the trend likely to continue for some time, there are a few good stocks to sell that stand out.
Nonetheless, shares of some unprofitable companies will ultimately climb over the next 12 months. That’s because they have tremendous potential that Wall Street is currently ignoring due to its fears about higher interest rates. As these firms’ great potential becomes more apparent, and investors’ worries about rates ease, these stocks should jump during 2022.
Other money-losing companies, however, do not have great potential, as their fundamentals are actually weak and they are likely to struggle for many years to come. And as these realities become more apparent to investors, the stocks of unprofitable firms with poor fundamentals will plunge.
As a result, these five companies should definitely be viewed as stocks to sell.
- Teladoc (NYSE:TDOC)
- Coinbase (NASDAQ:COIN)
- Affirm Holdings (NASDAQ:AFRM)
- Palantir (NYSE:PLTR)
- DraftKings (NASDAQ:DKNG)
Now, let’s dive in and take a closer look at each one.
Stocks to Sell: Teladoc (TDOC)
As one of four companies on this list that’s likely being hurt by tough competition, Teladoc is in the telehealth sector. That said, this space has proven to have low barriers to entry.
As a result, the company — like other names on this list of stocks to sell — has had to spend huge amounts of money on sales and marketing. That, in turn, has caused it to stream large amounts of red ink.
Specifically, the amount that the company spent on advertising and marketing more than doubled last quarter, versus the same period a year earlier, reaching $111 million. And its expenditures on sales nearly tripled to $62.6 million.
Moreover, Teladoc’s net loss jumped to nearly $84.3 million in the third quarter, up from $35.9 million during the same period a year earlier.
Meanwhile, fears of the novel coronavirus are likely to ease further, as the omicron variation of the virus appears unlikely to lead to higher hospitalization rates, and vaccinations against the variant will likely be ready soon. As a result, Teladoc’s results are unlikely to get a meaningful boost from Omicron. And overall, there are no signs of its competition easing.
Coinbase is the one company on this list that’s profitable, but I expect that to change very soon.
In the wake of Powell’s warning about ending the Fed’s bond buying more quickly than expected, the value of cryptocurrencies has started to tumble sharply. That supports my long-held thesis that the crypto boom was largely caused by stimulus from the government, rather than by any actual value that the cryptos hold.
I’ve also long believed that, for the most part, cryptos are a bubble. As a result, with the cryptos starting to tumble, there’s a good chance that they will continue to do so for a long time.
That, of course, is very bearish for Coinbase, which operates the largest exchange for cryptos. Also, another negative for COIN stock is the apparent desire of SEC Chairman Gary Gensler to more heavily regulate crypto exchanges.
Stocks to Sell: Affirm Holdings (AFRM)
Affirm is an unprofitable company that appears to be encountering very tough competition.
As I’ve written in previous columns, I don’t think that the company’s core offering — its buy now, pay later (BNPL) product — is very difficult for large companies to replicate. Indeed, a number of companies, including PayPal (NASDAQ:PYPL) and JPMorgan (NYSE:JPM), have already implemented BNPL.
Indicating the presence of tough competition, Affirm’s sales and marketing costs ballooned to nearly $64 million in its fiscal Q4, up from just $5 million during the same period a year earlier. Its total operating costs also jumped to $386 million from $114 million, and its operating loss soared to almost $125 million from $39 million.
Despite the fact that Affirm is deep in the red, AFRM stock’s valuation is quite high. Specifically, its trailing price-sales ratio (P/S) is a huge 30.8. So, for all of these reasons, AFRM stock is a prime candidate for one of the top stocks to sell.
Palantir is another unprofitable company with a huge valuation. And as I’ve written multiple times in the past, I believe that many are greatly underestimating its competition.
The company’s loss from operations came in at a huge $92 million, and its operating margin was -23%. Additionally, its net loss was more than $102 million.
One sign of Palantir’s tough competition is that it has recently lost or is in the process of losing a significant number of government contracts. For example, the U.K. recently declined to renew a major healthcare contract with Palantir, moving it to BAE Systems (OTCMKTS:BAESY) instead. And there have been reports that the company could lose a key deal with America’s Immigration and Customs Enforcement department.
Additionally, in the private sector, the company has apparently obtained multiple deals with companies in whose special purpose acquisition companies (SPACs) it has invested. That is of questionable value for the investors in PLTR stock since it suggests that the company may be essentially paying for deals with its investments. And that, in turn, raises more questions about the strength of the company’s comparable advantages.
Over the past month, PLTR stock has tumbled almost 25%. And given its lack of profitability and still-huge valuation (its trailing P/S ratio is a large 24.5), the shares are likely to keep plunging in 2022.
Stocks to Sell: DraftKings (DKNG)
DraftKings has had an interesting ride in 2021. In its latest quarterly report, loss from operations came in at $546.5 million, up from a loss of slightly above $348 million in the same period a year earlier.
Furthermore, the company’s sales and marketing expenditures climbed close to 50% to over $300 million. As I’ve indicated earlier, I believe that when companies have gigantic year-over-year increases in sales and marketing, there’s a high likelihood that they’re facing intense competition.
Indeed, according to Wells Fargo, DraftKings only obtained 19% of U.S. online sports gambling revenue in the first half of this year. The sector’s leader, FanDuel, had a much higher 33% share of the space. So in this very competitive sector, DraftKings is far behind the leader.
Meanwhile, despite the company’s extremely large losses and very tough competition, the valuation of DKNG stock is still quite elevated. Specifically, its trailing P/S ratio is nearly 10.
On the date of publication, Larry Ramer 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.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.