In the volatile stock market, understanding when and what to sell is equally vital as knowing when and what to buy. Here, the focus is on three beaten-down stocks to sell due to their fundamentals. These fundamentals can point to a potential downturn when the market punishes weaknesses. The first company, a leader in systems software, shows impressive subscription revenue growth. However, sustaining this high growth rate is increasingly challenging due to market saturation. As the base revenue grows, maintaining exceptional performance becomes difficult.
Meanwhile, the second company, a major player in the apparel industry, highlights a stark contrast between its international and domestic revenue growth. While international markets, particularly China, show robust growth, the U.S. market lags significantly. Internal factors, such as narrow product assortments and stock issues, contribute to this underperformance. Finally, the third company, a broad-line retailer, faces declining comparable sales and significant monthly sales volatility. This inconsistency complicates inventory and promotional strategies, reflecting broader economic vulnerabilities.
ServiceNow (NOW)
ServiceNow (NYSE:NOW) specializes in IT systems software. For Q2, the company’s subscription revenue grew 23% year over year (YoY), reaching $2.542 billion. This growth exceeds their high-end guidance by 1%. However, sustaining this growth rate is questionable. Maintaining high growth becomes challenging as base revenue grows larger. The company’s Current Remaining Performance Obligations (CRPO) grew 22.5% YoY at constant currency, surpassing guidance by 2%. This indicates strong demand but suggests market saturation.
Moreover, a slight deceleration in growth rates compared to previous periods supports this concern. The company’s ability to find new, high-value customers and expand existing relationships is crucial. ServiceNow closed 88 deals over $1 million in net new annual contract value (ACV) in Q2, a 26% increase YoY. However, growth in large deals may lead to customer concentration risk. A significant portion of revenue comes from a small number of large customers.
The company is vulnerable to losing key clients or seeing a decline in their spending. Reliance on a few major deals to drive growth could hinder maintaining its growth trajectory. Market saturation challenges raise concerns about ServiceNow’s sustainability. Therefore, these factors make it a high mark among beaten-down stocks to sell.
Lululemon Athletica (LULU)
Lululemon Athletica (NASDAQ:LULU) is known for apparel and luxury goods. International revenue grows rapidly, but the U.S. market shows modest growth. US revenue increased by only 2% in constant currency. This is weak compared to a 52% increase in mainland China. Other international markets saw a 30% growth, contrasting with Lululemon’s solid international expansion. However, its domestic market struggles to maintain momentum. Internal factors contribute to the slower U.S. start. Historically, Lululemon’s domestic market was its backbone.
Further, missed opportunities exist in the women’s and bags categories. The color palette needed to be narrower, and the leggings needed more diversity. Stock issues also affected performance. Smaller sizes were out of stock, and newer bag styles, like the two-tone tote, required revision. These issues impacted sales growth and customer satisfaction. Low, unaided brand awareness is another area for improvement. Less than 20% of U.S. men know the brand.
Overall, awareness is in the low 30s. Many potential customers must be aware of Lululemon’s offerings, limiting brand growth and market penetration. The U.S. market underperforms, showing significant growth discrepancies. To sum up, this places Lululemon among the beaten-down stocks to sell.
Big Lots (BIG)
Big Lots (NYSE:BIG) is a broad-line retail company. A critical weakness for Big Lots is the substantial decline in comparable (comp) sales. In Q1, comp sales trends were down 9.9%, missing the company’s guidance of a mid-single-digit decline. This drop in sales is alarming and indicates a substantial erosion in the ability to attract and retain customers. Monthly sales trends show volatility. February was the weakest month, while March saw a rebound. April experienced another deceleration. Such inconsistency complicates inventory, staffing and promotions.
Additionally, the correlation between sales trends and consumer sentiment is another issue. The broader economy heavily influences the company’s performance. Consumer confidence impacts sales, making the company susceptible to economic shocks. The company has enhanced liquidity with a new $200 million loan facility. Yet, net liquidity remains a concern. Net liquidity at the end of Q1 was $289 million, a modest increase from $254 million at the end of Q4 2023.
Finally, declining sales and monthly volatility indicate struggles in customer retention. Market consistency is also a challenge. This justifies Big Lots’ presence on the beaten-down stocks to sell.
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.
