It is imperative to recognize the worst stocks to buy in a bear market and avoid them going forward this year.
Even the savviest and most knowledgeable investors need to be wary when it comes to picking stocks in a bear market. Markets still remain sluggish, and all indications also point to a sub-par showing this year.
The key indicator is financial stability. Companies with weak financials are rarely successful in bear markets. It might seem tempting to try and generate short-term profit by taking a “gamble” on struggling firms, yet this often leads to disappointment, especially in a market downturn.
AMC Entertainment (AMC)
AMC Entertainment (NYSE:AMC) has been a popular meme stock that surged to new heights a couple of years ago during the retail trading frenzy.
However, it seems no amount of blockbuster films or a short squeeze could save this company at this time. AMC CEO Adam Aron states that the biggest problem for the theatre chain giant is the lack of movies. However, despite the release of multiple blockbusters, AMC’s massive cash burn of over $1 billion over the past five quarters rubbishes its CEO’s claims, making it one of the worst stocks to buy in a bear market.
AMC needs to generate consistent profitability, with every metric firmly in the red. For instance, its gross profit margins have averaged a negative 15% over the past five years. It’s hard to foresee a scenario where dilution or restructuring doesn’t occur this year.
Redfin’s (NASDAQ:RDFN) stock has plummeted in the past year, losing more than 83% of its value.
Their operational model of directly hiring agents has proven incredibly expensive, while its revenue growth could have been more active in recent quarters.
In the past few quarters, revenue growth has slowed down to double-digit growth compared to the triple-digit growth it registered in 2021. The Fed’s incessant rate hikes have put homebuyers in a tricky situation, with mortgages becoming increasingly unaffordable.
Perhaps the most problematic element for Redfin is its profitability positioning, making it one of the worst stocks to buy in a bear market. EBIT and net income margins are at a negative 10% and 11.7%, respectively. Therefore, Redfin’s future looks increasingly uncertain as its financial metrics weaken further.
Coinbase (NASDAQ:COIN) hasn’t been a good bet for a while, and now the collapse of FTX has further diminished trust in crypto exchanges as a whole.
Its disappointing track record and FTX’s bankruptcy will only add to potential investors’ doubts over its long-term attractiveness. The stock has lost over 70% of its value in the past year and is likely to continue performing horribly for the foreseeable future.
The news coming out of Coinbase CEO Brian Armstrong’s mouth is increasingly worrying for its long-term investors. CEO Brian states that company revenues are likely to be 50% or lower than the previous year.
Quarterly losses are piling up, pointing to a tough road ahead for the firm. Hence, it’s going to be a remarkably challenging year for the firm.
The GameStop (NYSE:GME) saga of early 2021 was exceptional, earning its place in market history books. However, the prospect that something similar might happen again two years later is highly unlikely.
Many factors, such as the environment and regulations, have changed to make short squeezes much more difficult to achieve. Investors should therefore be wary of speculative investments bearing high risks and prioritize financial security instead.
The video game retailer has been reporting deplorable quarterly results for a while, consistently losing truckloads of cash. In its third quarter, it reported adjusted earnings per share of negative 31 cents, three cents lower than expectations.
Revenue dipped 8.5% from the prior year to $1.19 billion, missing estimates of $160 million. What’s more disappointing is that software sales, a key growth area for the business’s future, tanked from $435 million to $352 million.
Tilray Brands (TLRY)
Tilray Brands (TLRY) is one of the most popular cannabis stocks in the market but has performed horribly in the past year.
The firm’s popularity expanded during the cannabis boom in Canada, but TLRY has failed to capitalize on that momentum. TLRY’s volatility and speculation make it more akin to a gamble than a truly informed investor move.
The firm has been hit by substantial currency headwinds in the quarter, reporting a hefty drop in sales. Its second-quarter revenues were only $144.1 million, down from $155 .2 million in the prior November quarter.
Moreover, its cannabis business dropped by $8.9 million from the same period last year, while its distribution business got pummeled by $8.7 million. Additionally, its profits are firmly in the negative with a net income margin of negative 95%.
Zoom Video (ZM)
Zoom Video (ZM) saw an incredible surge in its user base due to the advent of the pandemic.
However, as the pandemic slowly fades, the demand too has wavered – resulting in a decline in its existing customer base.
The company’s revenues have normalized as a result, and it now faces stiff competition from other video platforms. It is evident that unless Zoom adopts a new, innovative approach to survive these changing times, its popularity will inevitably suffer.
The result is a steady decline in users and an alarming slowdown in revenue growth from triple-digit increases to single-digit gains.
Zoom reported a precipitous drop in the addition of new customers in its dwindling customer base. Additionally, stock-based compensation expense makes up over 20% of its total sales. Therefore, Zoom has an uncertain future where it becomes increasingly difficult for them to remain at the forefront of the sector.
Vroom (VRM) eCommerce platform enjoyed remarkable expansion during the pandemic years, however, its current performance is dire.
With prices rising and expenses outpacing revenue, the company is likely to implement belt-tightening measures. Unsurprisingly, retaliatory measures have been adopted in an attempt to reduce cash outflow, improve margins and cut operational costs which may give them a fighting chance of reviving profitability.
The long-term goal of achieving an EBITDA margin between 5% and 10% looks increasingly out of reach for the firm given its already precarious business model. The current economic climate could not have come at a worse time, severely intensifying the already evident cracks that existed in their plans.
Over the coming weeks and months, it is widely expected that the firm will find it difficult to maintain value as they helplessly burn through cash even faster than initially anticipated. It’s clear that this persistent dilemma is unlikely to be resolved anytime 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