The right stocks can make you rich and change your life.
The wrong stocks, though… They can do a whole lot more than just “underperform.” If only! They can eviscerate your wealth, bleeding out your hard-won profits.
They’re pure portfolio poison.
Surprisingly, not many investors want to talk about this. You certainly don’t hear about the danger in the mainstream media – until it’s too late.
That’s not to suggest they’re obscure companies – some of the “toxic stocks” I’m going to name for you are in fact regularly in the headlines for other reasons, often in glowing terms.
I’m going to run down the list and give you the chance to learn the names of three companies I think everyone should own instead.
But first, if you own any or all of these “toxic stocks,” sell them today…
The Gap (NYSE:GPS)
The Gap has recently seen its stock surge after its Q3 2023 earnings report in mid-November, which led to a 50% rally in about six weeks. However, it’s crucial to look beyond this short-term spike.
As we step into 2024, The Gap’s stock has started to lose its momentum, already down 7%. With the economy showing signs of cooling and the holiday shopping season now in the rearview mirror, the coming months could present challenges for GPS earnings.
There’s more cause for caution. Despite outperforming Q3 earnings expectations, The Gap issued a guarded forecast for the crucial year-end holiday quarter, expecting flat sales. It’s important to note that much of the recent rally in GPS stock was fueled by high hopes pinned on new CEO Richard Dickson, known for his successful turnaround of the Barbie franchise at Mattel (NASDAQ:MAT). However, even with Dickson at the helm, The Gap could face significant headwinds if the economy slips into a recession this year.
For those holding GPS stock, this might be a good time to reassess your position, considering the potential economic challenges and the stock’s recent downward trend.
Cintas (NASDAQ:CTAS)
As artificial intelligence (AI) continues to evolve, it’s poised to replace human roles in various sectors. This shift could significantly impact Cintas, whose business model relies on the number of workers wearing its uniforms. With AI set to automate jobs in industries like manufacturing and oil – both key markets for Cintas – the company’s revenue and profits could face a steep decline.
Consider the implications: In factories, where many employees currently don Cintas uniforms, AI could accelerate automation. The oil sector, another significant client base for Cintas, is also on the cusp of increased automation due to AI advancements.
Adding to the concern, CTAS stock currently sports a high forward price-earnings ratio of 40.6, making it susceptible to a market correction. For investors in CTAS, this could be a crucial time to reassess the stock’s place in your portfolio, especially given the potential challenges posed by the rapid advancement of AI technology.
Zillow (NASDAQ:Z)
Zillow, the well-known real estate listing platform, is in a bit of a bind. After reaching its peak during the pandemic housing boom, the stock has since plummeted by over 70%. The company, currently unprofitable, faces a tough road ahead in the real estate market. With interest rates staying high and people opting to stay put rather than sell, both housing and rental prices are soaring, potentially leading to a shift towards renting over buying.
Here’s the crux of the issue for investors: Zillow’s revenue growth is hitting the brakes. In the third quarter of 2023, the company only managed a 3% increase in revenue. Both residential and mortgage revenues have seen year-over-year declines, accounting for 77.8% of total revenue. While rental revenue did jump by 34% year-over-year, it wasn’t enough to spark significant growth.
Despite a 24% rise in its stock over the past year, Zillow seems primed for a correction. High revenue growth is essential for maintaining a robust valuation, and the current state of the real estate market doesn’t bode well for a quick financial turnaround for Zillow. For long-term investors, this might be the time to reevaluate your position in Zillow, considering these market dynamics and the company’s slowing revenue growth.
