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2 Stocks I'd Avoid at All Costs

By Jon Quast - Mar 23, 2020 at 7:47AM

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When stocks look cheap, it's still important to only buy businesses you want to own for the long haul.

We're officially in a bear market, and that creates a challenge for optimistic investors. Right now, almost any stock can look like a bargain -- some even trade more than 50% off 52-week highs. It almost feels like you could buy anything and do well once the market recovers. But it's important to remember that we aren't trading stocks because we think they can bounce back in the short term. We're investing in companies we believe will create meaningful shareholder value for years to come.

It's as simple as this: If you didn't like the business before the market crashed, it's probably still not a good idea to buy it now. With that in mind, here are two down stocks I'm still avoiding at all costs.

A woman with her arms crossed, signaling no.

Image source: Getty Images.

1. DISH Network

Satellite TV provider DISH Network's (DISH 2.45%) stock is down more than 50% from this year's highs, and now trades at just eight times trailing earnings. That certainly sounds cheap. But the company was facing challenges well before the coronavirus sent its stock tumbling.

People are canceling traditional pay-TV and moving toward on-demand streaming -- that's a well-known trend. This hurts DISH Network's core satellite business. It lost around 500,000 satellite subscribers in 2019 alone. The company is astute enough to realize it needs a streaming option, which is why it has Sling TV. However, even Sling TV lost 94,000 customers in the fourth quarter of 2019, as new streaming competition came online. That's not really a business I have confidence in long-term.

To be fair, DISH Network is diversifying away from just pay-TV and toward being a cellular carrier. It's acquiring Sprint's prepaid assets, which include Boost Mobile, for $1.4 billion. And as part of Sprint's merger agreement with T-Mobile, DISH will get use of T-Mobile's network at wholesale prices for seven years, as it builds out its own service. 

This new business direction might just be the ticket for DISH Network. However, I choose to err on the side of caution, patiently measuring its business transformation progress over time. Notably, by 2023, DISH has to offer a 5G broadband network that 70% of the U.S. population can access or face a $2.2 billion fine from the U.S. Treasury. To me, progress for its 5G network can be measured in 2020 and beyond while waiting to see if all this effort will create lasting shareholder value.

A phone displaying the Grubhub app.

Image source: Grubhub.

2. Grubhub

Food-ordering and delivery service Grubhub (GRUB) is one of the largest companies in its industry. Its stock is also down over 50% from 52-week highs and has never traded at a lower price-to-sales ratio. However, before piling into a "cheap" stock, investors should realize that competition is getting stiff. Other venture-capital-backed companies, like DoorDash, are currently content to undercut Grubhub on pricing in order to steal market share. 

In its third-quarter letter to shareholders, management noted that Grubhub is the only delivery player with profitable operations. But its customers aren't loyal to any one platform -- preferring to shop around for the best deal. So although delivery is growing in popularity in general, Grubhub must spend more to attract diners. In the fourth quarter, Grubhub's sales and marketing expenses grew 23% year over year.

Grubhub doesn't want to sacrifice profits, but the situation is complicated. Management noted in its fourth-quarter letter to shareholders that even though it's spending more to acquire customers, these customers are also spending less than expected. In short, customer-acquisition costs are accelerating while revenue growth is decelerating. For now, however, Grubhub continues to believe these new customers will eventually be profitable long-term. 

Also on profitability, it's important to note Grubhub's non-partnered restaurant additions in Q4. Partnered restaurants pay a pre-arranged commission to Grubhub. Non-partnered restaurants, by contrast, have no agreement. Grubhub merely adds them to the platform and develops its pricing structure internally. In Q4 alone, Grubhub added around 150,000 new non-partnered restaurants to its platform, taking its total to around 300,000.

Grubhub intends to price delivery services for these new non-partnered restaurants at break-even on an EBITDA basis. In other words, the company is trying to grab market share at the expense of profits, just like its competitors. That's a telling sign that profitability could decelerate further in coming quarters -- not a trend I want to invest in for the long haul

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Stocks Mentioned

DISH Network Corporation Stock Quote
DISH Network Corporation
DISH
$18.37 (2.45%) $0.44
GrubHub Inc. Stock Quote
GrubHub Inc.
GRUB

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