In the stock market, investors constantly seek stocks to sell to balance risk and reward. As they navigate the complex world, some stocks emerge as red flags, signaling potential trouble ahead. The article here undertakes a comprehensive exploration of three stocks that demand investors’ attention.
Also, the stock market, like a rollercoaster, has its ups and downs. But for these companies, the path forward seems cloudy as they grapple with a range of financial and operational challenges.
The first one faces an uphill battle to turn its ambitious spaceflight dreams into a sustainable business. The second one is tethered to the unpredictable world of mortgage rates, while the third contends with liquidity issues and a fixed cost structure in an ever-evolving entertainment landscape.
The countdown begins for these stocks, each with its own unique set of obstacles. Read more to dissect their health and growth prospects, providing insights to make informed investment decisions before the next market crash.
Stocks to Sell: Virgin Galactic (SPCE)
Virgin Galactic’s (NYSE:SPCE) revenue in Q2 2023 was approximately $2 million. This amount is relatively low, given the company’s ambitious goals and the considerable investments in developing its spaceflight technology. To achieve rapid value growth, Virgin Galactic has no other alternative except to increase its revenue stream significantly.
Looking at the operations, Virgin Galactic’s operating expenses in Q2 were $141 million, significantly surpassing its revenue. It looks like a behemoth relative to revenue. The company’s primary cost driver is research and development (R&D) expenses associated with the Delta Class spaceship development. Thus, high operating expenses are a hurdle to profitability and growth.
Virgin Galactic reported a negative adjusted EBITDA of $116 million in the second quarter. The negative EBITDA indicates that the company still needs to be profitable on an operational basis. Achieving profitability is essential for the company’s long-term value growth.
On the liquidity side, Virgin Galactic reported a negative free cash flow of $135 million in Q2. The company’s cash burn is a concern as it needs to maintain sufficient liquidity to fund its operations and investments in developing the Delta Class spaceships. Continued cash burn without a clear path to profitability can harm the company’s financial health.
While the company has returned to space with Unity 25 and plans to scale its commercial space flights, it still operates on a limited flight cadence. Increasing the frequency of flights is essential to maximize revenue and meet the demand of potential customers.
Finally, Virgin Galactic’s growth and profitability heavily rely on the successful development and deployment of the Delta Class spaceships. Any delays, technical issues, or cost overruns in the Delta Class program can hinder the company’s ability to scale its operations and generate revenue. Thus, it is one of the top stocks to sell, in my opinion.
Fannie Mae (FNMA)
Fannie Mae’s (OTCMKTS:FNMA) growth prospects are influenced by the prevailing economic conditions. One of the most critical factors affecting its growth is the level of mortgage rates. In Q3 2023, the 30-year fixed-rate mortgage reached 7.8%. Such elevated mortgage rates act as a significant barrier to homeownership, particularly for first-time buyers and those with modest means.
Furthermore, these high rates result in increased monthly mortgage payments, leading to decreased affordability. As a result, potential homebuyers may delay purchasing homes or be unable to enter the market. This directly impacts Fannie Mae’s ability to originate new mortgages and grow its portfolio. The demand for mortgages diminishes due to the high borrowing costs, inhibiting Fannie Mae’s potential for rapid value growth.
Additionally, affordability is another fundamental concern for Fannie Mae. The high prices of homes, coupled with the high mortgage rates, present significant challenges for consumers looking to buy homes. While homeowners who secured low mortgage rates in the past may be benefiting from rising home prices, prospective buyers are confronted with a tough housing market. This is particularly true for first-time buyers and those with limited means.
Lastly, high home prices, driven by limited housing inventory and demand from existing homeowners, can deter many potential buyers. These high prices make it difficult for individuals and families to purchase homes, especially in competitive housing markets. Overall, Fannie Mae’s growth potential is hindered by the limited pool of potential borrowers who can afford homes at current prices.
One of the most pressing concerns for AMC (NYSE:AMC) is its liquidity situation. While the company reported $643 million in liquidity at the end of Q2 2023, it acknowledges that it faces serious liquidity challenges. This is a fundamental weakness that may hamper its growth potential. AMC’s liquidity is particularly vulnerable during the seasonally weaker winter months, and the ongoing strikes by writers and actors add a layer of uncertainty.
Additionally, AMC’s fixed cost structure presents another potential weakness. The company’s operational costs remain relatively constant, irrespective of fluctuations in attendance and revenue. In periods of lower revenue, these fixed costs can become a significant burden, affecting the company’s profitability. AMC’s potential cash burn during the seasonally weaker winter months highlights a fundamental weakness. Hence, the company’s financial performance is subject to significant seasonal fluctuations, impacting liquidity and overall financial health.
While the worst COVID-19 pandemic may be behind us, there are lingering uncertainties related to the virus. AMC expressed hope that COVID-19 would become a distant memory by 2024 or 2025, but the trajectory of the pandemic remains uncertain. This uncertainty can impact consumer behavior, government regulations, and public health considerations, affecting the movie theater industry’s recovery.
Finally, despite efforts to reduce debt through repurchases and exchanges, AMC’s high debt levels still need to be addressed. Debt servicing costs may continue to exacerbate under recent interest rate increases (higher for longer), and this financial burden puts pressure on the company’s profitability. That makes it one of the top stocks to sell, in my book.
On the date of publication, Yiannis Zourmpanos did not hold (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.