Stronger-than-expected job numbers could lead the Fed to raise rates higher than investors expect. Increased recession fears have led to a sell-off in the market recently. Given the highly uncertain market environment, we think it might be prudent to avoid the fundamentally weak popular stocks Block (SQ), Roku (ROKU) and Lucid (LCID), which investors have recently shorted. Keep reading….
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The stock market and the economy have struggled this year due to decades of high inflation, aggressive monetary tightening by the Federal Reserve, the economic fallout from Russia’s invasion of Ukraine and the growing likelihood of a recession.
The Fed raised interest rates this year in the highest gear since the 1980s, including increases of 75 basis points in its last four meetings to combat persistently high inflation. As consumer price index (CPI) data came out cooler than expected for October, Fed Chairman Jerome Powell hinted that the central bank is ready to downshift the size of the rate increases at the meeting this month.
As Fed officials signaled plans to raise their benchmark rate by 50 basis points this week, the strong November jobs report underlines the risk that the Fed will raise the final interest rate above 5%. In addition, the central bank seems ready to trigger a recession to combat stubborn inflation.
Persistent recession fears have made stock market forecasts for 2023 unusually bearish. Most big names, including Bank of America (BAG) and Morgan Stanley (MRS), to expect stocks crash more than 20% next year.
Given the current challenging market conditions, investors are short-selling popular but fundamentally weak shares of Block, Inc. (SQ), Roku, Inc. (ROKU), and Lucid Group, Inc. (LCID). So these stocks are now best avoided.
Block, Inc. (SQ)
SQ creates tools for merchants to accept card payments and provides reporting, analysis and next day settlement. It offers various hardware products, software products and developer platform. The company serves the United States, Canada, Japan, Australia, France, Ireland, Spain and the United Kingdom.
SQ has seen some unusual options activity lately. Around 993 put options were trading on Dec. 9, indicating bearish sentiment around the stock.
For the fiscal third quarter of 2022 ended September 30, 2022, SQ’s total operating expenses increased 45.6% year over year to $1.62 billion. Operating loss was $48.79 million compared to an operating income of $22.99 million in the same period last year.
In addition, the company’s net loss attributable to common stockholders was $14.71 million, compared to net profit attributable to common stockholders of $84,000 in the year-ago period. In addition, total liabilities were $12.59 billion as of September 30, 2022, compared to $11.71 billion as of December 31, 2021.
SQ’s 12-month gross profit margin of 32.72% is 34.3% lower than the industry average of 4.77%. Also, the 12-month ROCE, ROTC and ROTA are negative at 5.18%, 1.51% and 1.73% compared to industry averages of 5.00%, 3.34% and 1.66% respectively.
Analysts expect SQ’s earnings per share and revenue for the fiscal period ending December 31, 2022, to decline 36.8% and 0.9% year over year to $1 and $17.50 billion, respectively. The stock is down 60.6% since the start of the year and 65.4% over the past year to close its last trading session at $64.60.
SQs POWR ratings reflect bleak prospects. The stock has an overall rating of D, which equates to a sell in our proprietary rating system. The POWR Ratings rate stocks on 118 different factors, each with its own weighting.
Within the F rating Financial Services (Enterprise) industry, it ranks 84 out of 104 stocks. The company has a D rating for momentum, stability and quality.
click here to see SQ’s additional POWR ratings for growth, value and sentiment.
Roku, Inc. (ROKU)
ROKU operates a TV streaming platform through two segments: Platform and Player. The platform allows users to discover and access various streaming content and content publishers to build a large audience and monetize it. ROKU’s streaming players and TV-related audio devices are available through direct retail sales and licensing agreements with service providers.
About 5,185 put options for ROKU traded on Dec. 9, indicating bearish sentiment.
For the fiscal third quarter of 2022 ended September 30, 2022, ROKU gross profit declined 2% year over year to $356.79 million. Operating expenses increased 70.7% from last year’s value to $503.78 million. Operating income was $146.99 million compared to operating income of $68.85 million in the prior year quarter.
The company’s net loss was $122.18 million and $0.88 per share, compared to net income of $68.94 million and $0.48 per share, respectively, in the same period last year.
ROKU’s 12-month gross profit margin of 46.61% is 7.4% lower than the industry average of 50.3%. The stock’s 12-month ROCE, ROTC, and ROTA of -8.68%, 4.78%, and 5.40% are similar to industry averages of 6.18%, 4.13%, and 2.30%, respectively.
Analysts expect ROKU’s loss per share for the first quarter of fiscal 2023 (ending March 2023) to increase 449.1% year over year to $1.04. The consensus estimate of revenue for the same quarter points to a 2.4% year-over-year decline to $716.16 million. Also, the consensus estimate of loss per share of $4.28 for the next fiscal year (ending December 2023) indicates a 19.7% year-over-year deterioration.
The stock is down 44% over the past six months and 77.8% year-to-date to close its last trading session at $51.74.
ROKU’s POWR ratings are consistent with this bleak outlook. It has an overall F rating, which equates to strong sales in our proprietary rating system.
It has an F grade for growth and a D for stability and sentiment. Within the Consumer Goods industry, it ranks 55 out of 59 stocks. To see ROKU’s other ratings for momentum, value and quality, click here.
Lucid Group Inc. (LCID)
Technology and automotive company LCID develops technologies for electric vehicles (EV). The company builds and sells electric vehicles, electric powertrains and battery systems. It operates more than 20 retail studios in the United States. The stock has been seeing some unusual options lately. On December 9, approximately 791 put options for LCID were traded, indicating bearish sentiment.
For the fiscal third quarter of 2022 ended September 30, 2022, LCID total costs and expenses increased 77.6% year over year to $882.98 million. Operating loss increased 38.3% from the prior year quarter to $687.52 million. The company’s adjusted EBITDA loss was $552.90 million, a 125.7% year-over-year deterioration.
In addition, the company’s net loss widened 1.1% year over year to $530.10 million, while net loss per share attributable to common stockholders was $0.40. Non-GAAP free cash outflow was $859.53 million, up 123.6% year over year.
LCID’s 12-month gross profit margin of -213.72% is comparable to the industry average of 35.41%. The 12-month asset turnover rate of 0.06% is 94.3% lower than the industry average of 1.01%. In addition, the 12-month ROCE and ROTC of -46.49% and 27.38% are negative compared to industry averages of 12.92% and 6.59%, respectively.
Analysts expect LCID’s loss per share to increase 45.6% year over year to $0.43 for the current quarter ending December 31, 2022. Also, the consensus estimate of loss per share of $1, 31 for the next fiscal year on a 10.9% year-on-year deterioration. more than year. The company has a disappointing history of earnings surprises, as it fell short of its earnings-per-share consensus expectations in three of its four trailing quarters.
Over the past six months, the stock is down 54% year-to-date and 78.8% to close out the last trading session at $8.68.
LCID’s poor fundamentals are reflected in the POWR ratings. The stock’s overall F rating translates into strong sales in our proprietary rating system.
LCID has an F rating for value, quality, stability and sentiment. Within the D rating Car and vehicle manufacturers industry, it ranks 56 out of 62 stocks.
click here to view the additional momentum and growth POWR assessments for LCID.
SQ shares fell $0.60 (-0.93%) during premarket trading on Monday. Year-to-date, SQ is down -60.00%, versus an increase of -16.24% in the benchmark S&P 500 index over the same period.
About the author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. With its fundamental approach to stock analysis, Mangeet aims to help retail investors understand the underlying factors before making investment decisions.
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