The current market crash brought on by the coronavirus pandemic has created a situation where many great stocks are trading at bargain prices. In some cases, though, low prices may not represent a bargain.
There are two stocks currently trading cheap that I'd avoid right now. The first is one that was struggling before the COVID-19 crisis got going. The second one faces increasing competition and therefore, pressure on its pricing power. Let's take a closer look at these two stocks and what makes them investment problems.
Image source: Macy's.
1. Macy's: Already facing problems online and in declining malls
Embattled retailer Macy's (M +0.23%) really needs a Miracle on 34th Street to recover from the blow it has been dealt by the coronavirus outbreak. Prior to the pandemic that shut down stores and kept tourists home, Macy's already was suffering from declining sales and profits, and as of Feb. 1, cash and cash equivalents totaled $685 million, down from $1.16 billion a year earlier.
The company announced a recovery plan in early February, saying it would close stores in lower-tier malls, explore non-mall possibilities, and launch private brands with billion-dollar potential. The deepening of the coronavirus outbreak, however, put the brakes on some of those efforts and put the brakes on the possibility of any level of recovery in the near term. Macy's suspended its dividend, drew down $1.5 billion on its revolving credit facility, and cut salaries of director-level executives. Chief executive officer Jeff Gennette gave up his salary as a temporary measure as well.
The company said that, though the efforts have helped, they aren't enough. Macy's has kept its e-commerce site open but said it still has lost most of its sales. The latest news is the company's chief financial officer is stepping down, effective May 31. That represents an added challenge since the CFO would play an important role in the company's turnaround plan.
Even though the shares have lost 65% in value since the start of the year, playing the Macy's recovery story is too much of an investment risk right now. When the company itself says it has lost most of its sales, and its efforts to combat the impact of the current crisis aren't enough, there is reason to worry. Before the pandemic hit, Macy's already faced the problems of online competition and the decline of malls. Now, Macy's must survive this current quarter with closed stores and lost sales, then try to build up the business in a weakened economy. As much as I love shopping at Macy's, I won't be shopping for the shares any time soon.
2. Beyond Meat: A tightening economy doesn't favor this premium product
Alternative protein leader Beyond Meat (BYND +5.72%) surely is less vulnerable to the coronavirus crisis than retailers. But the company's restaurant and food services segment likely will suffer as people, following stay-at-home orders, eat fewer meals at restaurants. Oppenheimer analyst Rupesh Parikh cut his Beyond Meat sales estimates for this year to $376 million from $508 million, and predicted foodservice sales would decrease 5%, instead of growing 95% as he had forecasted earlier, Barron's reported. On top of this, as I've written in the past, my concern is about Beyond Meat's ability to maintain margins as others enter the plant-based meat market. Rivals include former Beyond Meat investor, Tyson Foods, food industry heavyweights Perdue Foods, Nestle, and Kellogg, as well as private company Impossible Foods.
Though Beyond Meat's revenue increases have been by triple digits percentages, will the company be able to keep up such a pace in the economy the coronavirus leaves behind? I'm thinking of the record levels of unemployment claims in the U.S. these past few weeks. Consumers who have lost their jobs may begin to look for less expensive alternatives, and it's easy enough to find them. For example, a package of Beyond Meat's plant-based ground beef goes for $8.99, while Pure Farmland's competing product sells for $5.99. And finally, in this market crash, investors may favor shares of stocks with a history of progressive long-term gains that have been unfairly punished. Beyond Meat soared 160% the day of its market debut last May, then peaked at more than $220 a share in July before retreating. These days, the stock is trading at about $70 a share, down 8% so far this year. I expect gains from Beyond Meat in the near term, but as a long-term investor, I'm concerned about this consumer-staples stock's ability to climb well into the future.
