With the market at an all-time high, it's good for investors to be selective with their stocks. Companies with broken business models, unpredictable headwinds, or brand-tarnishing scandals are best avoided. Let's take a closer look a three stocks that fall into those categories -- Twitter (NYSE:TWTR), Ellie Mae (NYSE:ELLI), Chipotle Mexican Grill (NYSE:CMG).
Twitter's monthly active users rose 5% annually to 328 million last quarter, but that was flat from the previous quarter. Its total revenue slipped 5% annually to $574 million, and its ad revenue fell 8% -- marking its third straight quarter of ad revenue declines.
Twitter's ad revenue is declining because it's lowering ad prices to attract more advertisers. Twitter believes lower ad prices will convince companies that its ads offer a better return on investment than other social-media platforms do, but it could also simply convince them that the platform is dying. CEO Jack Dorsey is still serving as the CEO of online payment processor Square, and the loss of over a dozen top executives since his return in late 2015 has raised serious doubts about his leadership abilities.
Twitter's non-GAAP net income fell 5% annually to $56.3 million last quarter, but its GAAP loss widened from $102.7 million to $116.5 million. Wall Street expects Twitter's revenue and non-GAAP earnings to respectively drop 7% and 40% this year -- so this troubled stock could tumble even further.
Ellie Mae's Encompass cloud platform processes about a quarter of all U.S. mortgage applications. The platform modernizes and streamlines the process, which is usually a time-consuming and low-tech one requiring fax machines and piles of printed documents. It also does credit checks to ensure that borrowers are creditworthy.
Ellie Mae's business boomed after the subprime meltdown, with tighter lending regulations, low interest rates, and recovering housing prices fueling its top- and bottom-line growth.
However, that growth gradually decelerated, and its 16% annual sales growth during the second quarter missed expectations and marked its slowest growth rate in three years. Its non-GAAP earnings dipped 6% and missed analyst estimates, and its forecast for a 34%-36% earnings decline for the year was well below expectations for a 15% drop.
Ellie Mae blames those declines on tighter housing inventories, lower refinancing activity, and lower loan volumes. It expects its growth to accelerate next year, but rising interest rates, an aging bull market, and economic uncertainties all cast doubts on that forecast. All that uncertainty isn't acceptable for a stock that trades at 68 times earnings.
Chipotle Mexican Grill
Chipotle has struggled with food-safety issues for nearly a decade now. In 2008 and 2009, several hundred Chipotle customers were infected by hepatitis A, norovirus, and campylobacteriosis. In 2015, outbreaks of E.coli, norovirus, and salmonella affected hundreds of other customers.
Chipotle tightened up its safety standards and offered free food to lure back customers, yet a new outbreak of norovirus occurred in mid-July. In an unfortunate coincidence, rodents fell through the ceiling at one of its locations. Those incidents caused Chipotle stock to tumble over the past month.
Chipotle's critics repeatedly claimed that its heavy dependence on "locally sourced" ingredients is fragmenting its supply chain and causing safety issues. Chipotle CEO Steve Ellis denies those claims and insists that the recent outbreak was an isolated incident caused by a sick employee. Nonetheless, the incident is likely to throttle Chipotle's growth this year -- which is bad news for a stock that trades at a lofty 75 times earnings.
The key takeaways
I don't think Twitter, Ellie Mae, and Chipotle are doomed. But I think investors shouldn't touch Twitter until it can grow its monthly average user numbers and advertising revenue again. Ellie Mae isn't a worthy buy until it can stabilize its revenue growth as interest rates rise, and Chipotle will remain in the penalty box until it can fix its ongoing food-safety issues.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Ellie Mae, and Twitter. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.