I took a look at three stocks to avoid last week, and just one of the three investments declined. Burned by a nearly 42% pop in a home goods retailer, the average pick moved 13.7% higher. The market's 1.5% gain looks tiny in comparison, but I'm going to try again.
For this week, I see DraftKings (DKNG +1.61%), Nano-X Imaging (NNOX +0.00%), and Paychex (PAYX 1.18%) as vulnerable investments in the near term. Here's why I think these are three stocks to avoid this week.
Image source: Getty Images.
DraftKings
Shares of DraftKings hit an all-time high on Friday, and it's hard to see why. DraftKings relies on a reliable and full slate of games to keep folks engaged in its sportsbook and fantasy sports offerings, and the wheels are starting to come off.
Six of the eight Major League Baseball wild card rounds were sweeps last week. The NBA Finals is starting to look like a sweep, too. Then we get to football. The NFL had its first game of the season postponed as a result of COVID-19 on Thursday, and another game got pushed out over the weekend. Unlike baseball, where some COVID-19 games were made up later in the season, there isn't that kind of flexibility in football. You can't have doubleheaders in a contact sport where weekly breaks are the norm. More importantly from a betting or fantasy football standpoint, this is a layer of uncertainty that's likely to dissuade many potential bettors from going out on a limb.
There's still a lot to like when it comes to DraftKings. It's become the top dog in the fantasy sports wagering market, and it proved its pandemic-proof mettle earlier this year, when the major sports leagues had their seasons interrupted. DraftKings was able to expand into golf, NASCAR, European soccer, and even UFC. The coronavirus crisis made DraftKings a more well-rounded company, and that will pay off when things get back to normal. But no one knows when that will be. You can't even bet on that on DraftKings. The NFL season as we know it is finally vulnerable, and just imagine how tenuous the state of college football is given the COVID-19 outbreaks across campuses over the past few weeks. DraftKings will be a great stock to buy when reality forces a sell-off, but it's not one you want to chase here at an explicable all-time high.
Nano-X Imaging
Battleground stocks are no stranger to this weekly column. If you have a great story to attract the bulls and some noted naysayers shouting about the bearish argument, I'm there. Volatility is what I stuff my feedbag with.
Nano-X has potentially bar-raising technology in its arsenal. It is working on a new medical imaging technology that it wants to make available at a fraction of what X-ray and CAT scan systems cost. After 100 years, there's no denying that old-school X-ray tech is ripe for disruption. The question is whether Nano-X has finally cracked the imaging code.
At least two of Wall Street's biggest bears, Citron Research and now Muddy Waters, have essentially called Nano-X a fraud. The stock itself has been a bucking bronco, but it soared 56% on Friday after the company announced that it will have the first live demonstration of its Nanox.ARC machine in a range of 2D and 3D medical imaging procedures at a virtual radiology conference in two months.
A lot of questions will probably be answered by then, but if you see Nano-X Imaging try to take advantage of its buoyant share price to raise money in a stock offering between now and late November -- before the world knows what it already knows -- you may already have the answer. Even if Nano-X holds back on its urge to print new shares, the next eight weeks will feature wild trading on the shares. Buckle up.
Paychex
Between the pandemic and recession, it's easy to see why paycheck-cutting is a fading art form. Payroll leader Paychex is one of the few stocks reporting financial results this week, and things could be dicey. Paychex has often been painted as an all-weather performer given its wide range of offerings, but revenue did decline 7% in its previous quarter. Earnings and adjusted earnings also posted single-digit dips. Paychex is mortal, and even its track record of consistently landing ahead of Wall Street profit targets is coming under fire.
| Quarter | EPS | EPS (Est.) | Surprise |
|---|---|---|---|
| Q1 2020 | $0.68 | $0.71 | 4.4% |
| Q2 2020 | $0.68 | $0.70 | 2.9% |
| Q3 2020 | $0.95 | $0.97 | 2.1% |
| Q4 2020 | $0.60 | $0.61 | 1.7% |
Data source: Yahoo! Finance.
Notice how the beats keep getting smaller with every passing quarter? That's not a comforting trend. It also bears pointing out that the same Wall Street pros who see Paychex earning $0.55 a share when it reports on Tuesday morning were forecasting a profit of $0.61 for the period three months ago. Analysts also see the revenue decline widening to 8% for the quarter. Paychex shouldn't be trading closer to its 52-week high than its 52-week low in this climate.
If you're looking for safe stocks, you aren't likely to find them in DraftKings, Nano-X Imaging, or Paychex this week.
