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Is It Time to Buy the S&P 500's 3 Worst Performing February Stocks?

By James Brumley - Mar 4, 2021 at 8:11AM

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The marketwide tide isn't sweeping whole groups of stocks higher and lower anymore, allowing investors to focus on individual companies again.

Everybody loves a bargain. In fact, good long-term stocks that have taken a short-term tumble are often said to be "on sale," meaning that low price won't be low for too long.

To this end, a handful of names found in the S&P 500 moved deep into the red last month. While these pullbacks may be piquing people's interest, smart investors know a sell-off doesn't inherently make a stock a buy -- there's got to be a good chance a rebound is in the offing before stepping in. Here's a much-needed closer look.

3 losing stocks

For the first time in about a year, a round of major stock sell-offs isn't directly related to the COVID-19 pandemic. February's losses instead largely look to be the result of profit-taking on names that were overzealously bought up through January. Simply put, investors were willing to pay a premium for picks seemingly impervious to the adverse impact of the pandemic. With reality setting in and a real recovery on the horizon, though, things are changing.

Man stopping a falling arrow from moving any lower.

Image source: Getty Images.

Take Akamai Technologies (AKAM -0.36%) as an example. Shares of the cloud computing and cybersecurity outfit were all the rage from November through January, and the company easily surpassed revenue and earnings estimates with its Q4 results posted in early February. The organization also now boasts more than a decade's worth of uninterrupted quarterly revenue growth; operating income growth isn't too shabby either. Its guidance for the quarter currently under way, however, left something to be desired. At least a few investors interpret that lackluster outlook as a sign that new competition is going to take a toll sooner than later. End result? Akamai Technologies stock slumped 14% in February.

Shares of electric vehicle (EV) icon Tesla (TSLA -2.29%) fared even worse, falling 14.9% over the course of last month.

It's complicated. Tesla was last year's darling, with the stock rallying an incredible 743% as the EV market -- and Tesla itself -- matured in a big way despite the crippled economic environment. This big gain left the stock vulnerable to a pullback, of course, and a temporary shutdown of its Model 3 production line due to a lack of parts was enough excuse to start the selling. Now that the dust is settling, though, the market may be entertaining more philosophical concerns.

Chief among them is Tesla's valuation. While it's the electric vehicle market leader, shares of the stock are still priced at an incredible 23 times the company's trailing revenue. For comparison, the S&P 500's average price-to-sales ratio presently stands at 2.7. It would take massive growth for Tesla to truly justify that valuation, and the company's challenge is getting tougher by the day. Fisker, Li Auto, and Lucid Motors are just some of the young EV makers now in a position to start stealing market share from Tesla. Then there's the fact that Tesla CEO Elon Musk recently bought $1.5 billion worth of cryptocurrency Bitcoin using Tesla's money. It's a speculation a bunch of shareholders probably wish Musk hadn't made.

Neither of those sell-offs are as big as the one Leidos Holdings (LDOS -0.07%) dished out last month, however. All told, shares of the defense and aerospace contractor shed 16.6% of their value in February.

With nothing more than a passing glance it's easy to conclude the selling mostly stems from a bearish call made by Spruce Point Capital Management in the middle of last month. In simplest terms, Spruce says Leidos spent too much on the acquisition of L3Harris Technologies' airport security business last year, and underscored that concern with accusations of fraud. The market isn't giving the company the benefit of any doubt.

What's next for Leidos, Tesla, and Akamai?

Tesla may still have more of last year's big gain to unwind, but Akamai is interesting at its current price. The company served up modest first-quarter guidance, but it's still calling for year-over-year growth. Also bear in mind that Akamai is in the habit of underpromising and overdelivering. It's topped earnings estimates in every quarter for the past four years. And as for Leidos, Spruce's doubt may or may not have merit, but the doubt itself looks like it's weighing the stock down well enough. It could take weeks if not months for that headwind to abate while the truth trickles out.

There's a bigger message buried within these differently driven losses, too. That is, investors as a whole are now less focused on figuring out how the pandemic will (or won't) affect results, and are back to being focused on each and every company's plausible prospects. That's a breath of fresh air in itself, and something everyone should bear in mind going forward.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
$681.97 (-2.29%) $-16.02
Akamai Technologies, Inc. Stock Quote
Akamai Technologies, Inc.
$92.06 (-0.36%) $0.34
L3Harris Technologies, Inc. Stock Quote
L3Harris Technologies, Inc.
$237.54 (0.73%) $1.72
Leidos Holdings, Inc. Stock Quote
Leidos Holdings, Inc.
$99.19 (-0.07%) $0.07
Li Auto Inc. Stock Quote
Li Auto Inc.
$38.11 (2.81%) $1.04
Fisker, Inc. Stock Quote
Fisker, Inc.
$8.52 (-5.65%) $0.51
Bitcoin Stock Quote
$20,198.70 (-1.22%) $-249.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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