With economic uncertainties and fluctuating market conditions and stocks to sell Thus, one must be vigilant about protecting portfolios from potential downturns. Here, the focus is on three high-risk stocks, making them prime candidates for selling before the next market collapse. The first is a prominent electric vehicle (EV) industry player, demonstrating growth but is plagued by volatile gross margins and profitability challenges due to supply chain disruptions and cost management issues.
Meanwhile, the second company is a leader in the cloud computing space. Rising GPU-related costs associated with its AI initiatives are eroding its profitability margins despite robust revenue growth. Finally, the third company is a retail chain, a top brand in discount merchandise. It faces declining comparable sales and profitability, reflecting softer consumer sentiment and economic pressures. Uncovering these companies’ fundamental weaknesses and market adversities minimizes risks and preserves capital.
Xpeng (XPEV)
Xpeng (NYSE:XPEV) is a leading Chinese EV maker. One of the primary concerns for Xpeng lies in its gross margin performance. In Q1 2024, Xpeng reported a gross margin of 12.9%, a marked improvement from the previous year but a decrease from the previous quarter’s 6.2%. This volatility suggests ongoing challenges in maintaining constant profitability as the company scales production and introduces new vehicle models. Factors such as fluctuating production costs and supply chain disruptions may contribute to this margin variability, impacting overall financial stability.
Further, Xpeng’s vehicle margin, a critical profitability metric closely related to car sales, raises more worries. The vehicle margin fell from 4.1% in the prior quarter, even though it increased to 5.5% in Q1 2024 from negative numbers a year earlier. This drop reflects the persistent challenges to attain sustainable profitability from car sales alone. Problems with inventory allowances and buy focus losses for some models, such as the P5, highlight the difficulties with product development and market forecasts.
To sum up, Xpeng is on the stocks to sell list due to concerns over volatile profitability margins, vehicle margins, and uncertainties in scaling production.
Snowflake (SNOW)
Snowflake (NYSE:SNOW) operates in the cloud data platform sector. For Q1 2025, the company’s product gross margin was 76.9%, slightly down year-over-year. This margin decline is attributed to increased GPU-related costs associated with investments in AI initiatives like Cortex and Arctic. The operating margin was 4% for Q1.
Snowflake acknowledged headwinds related to GPU costs impacting both revenue and research expenses. This indicates AI investments are currently impacting profitability margins. The anticipated free cash flow margin reduction from 44% in Q1 to 26% for 2025 further points to the challenge Snowflake faces. This is used to balance growth investments with maintaining solid cash flow.
Moreover, seven of Snowflake’s top 10 customers grew sequentially. However, the company’s reliance on large enterprise customers for a high portion of its top-line is a potential vulnerability. The high expenditure on sales and marketing efforts leads to low operating margins and reduces the consolidated bottom line. Hence, this high-cost structure may need to be revised in the long term.
In summary, Snowflake is on the top stocks to sell list as it faces profitability challenges due to high GPU-related costs linked to AI investments.
Big Lots (BIG)
Big Lots (NYSE:BIG) is a retail chain specializing in discount merchandise. In Q1 2024, Comparable or comp sales were significantly down for Big Lots, down 9.9% yearly. Their forecast of a drop in the mid-single digits was not met. The monthly patterns were erratic, with February being the worst month, March showing a bounce back, and April showing a decline. Softer consumer mood stemming from worries about inflation, unemployment, and interest rates caused the fall in comp sales.
Additionally, personal savings rates have been declining while credit card balances have grown. This macro relationship indicates financial strain among consumers managing their budgets. This likely affected discretionary spending on high-ticket items (furniture and patio furniture). As a result, net sales for Q1 were $1.01 billion, a 10.2% annual decrease. The adjusted net loss for Q1 was $132.3 million, leading to an adjusted diluted loss per share of $4.51. This highlights the profitability challenges faced by Big Lots amidst declining sales and increased operating costs.
To conclude, Big Lots’ is on the stocks to sell list due to declining comparable sales and weaker consumer sentiment and spending.
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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
