I took a look at three stocks to avoid last week, predicting that IMAX (IMAX 3.31%), Gap (GPS -4.11%), and Eventbrite (EB -2.30%) would have a bad week.
- Shares of IMAX moved 5% lower. The provider of super-sized theatrical experiences headed south despite a nearly 40% pop for the country's largest multiplex chain.
- Gap stock gapped higher, climbing 13% for the week. Sources told Bloomberg that the specialty retailer was considering unloading its China businesses. Three analysts also jacked up their price targets on the stock.
- Eventbrite rose 8% last week. Encouraging vaccination news is giving investors hope that a return to premium live events will happen sooner rather than later.
The three stocks averaged a hearty 5.3% increase for the week, paced by Gap's strong move. The S&P 500 rose 2.6% for the week. I fell short this time. This week, I see Interface (TILE -2.01%), America Airlines (AAL 0.70%), and Gap as vulnerable investments in the near term. Here's why I think these are three stocks to avoid this week.
Image source: Getty Images.
1. Interface
We're getting to the point in 2021 where we're a year beyond the pandemic shutdown, and that's going to see a lot of surprising names on the list of stocks hitting 52-week highs. One of the biggest surprises on that list is Interface, largely because its business is actually getting worse instead of better as we claw our way out of the COVID-19 crisis.
Interface is a leader in modular carpeting. What's modular carpeting? Well, it's basically carpet in tile form that can be quickly snapped together. It's a popular flooring solution for offices and other commercial settings. Interface also acquired a rubber flooring specialist a couple of years ago to give it some skin in the game of more recession-resistant businesses including hospitals and schools, but this is still largely a modular carpet company.
Interface put out disappointing fourth-quarter results two weeks ago. It posted a sequential revenue decline when analysts were holding out for a marginal uptick. Guidance calls for an even larger 9% sequential decline for the current quarter. There is some seasonality to this business, but this doesn't seem like a company moving up as we're heading out of the shelter-in-place phase of the pandemic.
2. American Airlines
Some air carriers are also hitting fresh 52-weeks highs, and American Airlines is one that just doesn't seem to deserve the ascent. I get why investors are turning to airlines as a play on post-pandemic living, but are we really going to be getting our passports stamped anytime soon? Is corporate travel ever going to be what it was before now that we've unlocked the convenience and cost savings of videoconferencing? Some genies don't go back into the bottle.
American Airlines is also problematic within the airline space itself. CNBC's Carl Quintanilla tweeted over the weekend that 96% of the combined free cash flow of the major air carriers over the past decade went to share buybacks. American Airlines was the only one of the five largest carriers to not generate positive free cash flow.
All hope isn't lost for American Airlines. It just leveraged its AAdvantage passenger loyalty program to line up $10 billion in additional financing. It's also making a smart codesharing deal with a rival turned partner to beef up its northeastern business. More U.S. passengers flew on Friday than any single day since mid-March of last year. However, with fuel prices moving higher and a global turnaround still a couple of years out, it's hard to see this new high sticking for long.
3. Gap
I'm going to repeat my bearish call on Gap. I thought it was overvalued heading into last week, and I don't think it's any cheaper after last week's 12% pop. Revenue declined in its latest quarter on flat comps. It's definitely better than other apparel retailers are faring in this climate, but there are still problems at Banana Republic and its Gap chains.
Revenue has declined in four of the past six fiscal years, and any sales blip with the inflow of stimulus checks will be short-lived. Gap may or may not find a buyer for its China business, but it's riding on the success of Athleta and Old Navy right now. This isn't a stock that should be trading at fresh 52-week highs. This isn't a stock that should've come through with a double-digit percentage gain last week. Mind the Gap.
If you're looking for safe stocks, you aren't likely to find them in Interface, American Airlines, and Gap this week.
