There is never a shortage of high-quality stocks to buy, but there's also an argument to be made that there's never a shortage of investments not to buy. Ambarella (AMBA -1.60%), Freshpet (FRPT 2.37%), and Funko (FNKO -1.79%) are three names that I think investors should be careful with in sizing up their next stock purchases.
All three have recently hit new highs, but their near-term prospects aren't as rosy as their stock charts suggest. I'm staying away from shares of these three companies, and I feel you should do the same. Let's go over the reasons why I think Ambarella, Freshpet, and Funko are stocks to avoid.
Chip stocks can be cyclical beasts, and there was a time when Ambarella seemed to be bucking the trend. The provider of low-power, high-def video compression and image processing solutions was in the guts of the hottest wearable cameras, drones, security gear, and automotive sensors. If there was a hot trend involving tiny cameras, Ambarella was there, cranking out heady growth and margins you don't typically see in the cutthroat chip business.
Times have changed. Revenue has declined in each of the three previous fiscal years, and the slide has been more pronounced on Ambarella's bottom line. Revenue growth is finally on the way, but there is no reason to believe that the bounce off of depressed levels will stick. The stock recently hit its highest level in nearly three years, but it's nowhere close to revisiting the the revenue, top-line growth, and margins it was cranking out in its prime.
This may seem to be a perfect time for Freshpet to shine. Its branded refrigerators stocking fresh dog and cat good are springing up across more supermarkets, pet supply stores, and other high-end shops. The trends are there for the taking. Pet ownership is on the rise, and the pet humanization movement finds more people spending lavishly on their canine and feline companions.
Unlike Ambarella's state of decline, Freshpet is hitting all of the right growth metrics. Double-digit top-line growth has been a staple for Freshpet since going public at $15 per share five years ago, and revenue gains are accelerating for the third consecutive year. It's a different story as we work our way down the income statement, with reported losses mounting and margins contracting.
Freshpet is investing in its growth, and the stock hitting all-time highs last week suggests that the market is cool with the strategy. What happens if the economy cools, as many people are starting to fear? Do you think pet owners will continue to fork over top dollar for slow-cooked refrigerated pet food when perfectly adequate conventional edibles are available for pennies on that dollar? There's a lot to like at Freshpet, but it's not easy to stomach at today's lofty prices.
Collectibles are cool, and Funko's licensed vinyl figurines are all the rage. If you've invested time in consuming an entertainment franchise, why not go out and spend another $10 or $20 to make it part of your decor? Revenue soared 38% in the company's latest quarter, and unlike Freshpet, we're seeing big gains on the bottom line at Funko.
Funko's approach in licensing third-party franchises makes sure that it's not susceptible to a single hot trend. Marvel's Avengers: Endgame was its biggest seller in its most recent quarter, and that followed back-to-back periods of Fortnite as the lead dog and Harry Potter before that. The real threat to Funko's dominance is that folks will move on from collectible vinyl figurines and bobbleheads in general or that the fickle tastes of pop culture collectors shift to other forms of expression. Investors spoiled by the 38% top-line growth that Funko has posted in two of the past three quarters may want to know that analysts see revenue gains decelerating sharply at this point. Your shelf space may still have room for another Funko Pop! figure, but your portfolio should have other ideas.