I took a look at three stocks to avoid last week, predicting that Interface (TILE 6.95%), America Airlines (AAL -2.06%), and Gap (GPS 0.77%) would have a bad week.
- Shares of Interface moved 7% lower. The company did announce its quarterly dividend during the week, but that's a non-event for the modular carpeting specialist.
- American Airlines rose nearly 7%.
- Gap stock inched less than 1% 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.
The three stocks averaged an essentially flat return for the week. The S&P 500 slipped 0.8% for the week. I fell short this time. This week, I see GameStop (GME 1.50%), and America Airlines, and Danimer Scientific (DNMR 5.84%) 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. GameStop
The video game retailer lost nearly a quarter of its value last week. GameStop has bounced back from some of its recent setbacks, but this week it's also going to step up with fresh financials. It's easy for bulls and bears to spin speculative buzz when there's no real news to back up their rosy or gloomy scenarios, but now we'll be getting hard numbers for the first time since the meme stock took off in late January.
The numbers won't be pretty. GameStop did preannounce in early January that holiday sales were down 3% for the nine-week seasonal shopping season. GameStop's top line declined despite e-commerce sales more than quadrupling. Comps were positive, but largely because its store count has declined 11% over the past year. E-commerce sales are baked into comps, and that figure was divided into 11% fewer stores this time.
This is peak earnings season for GameStop, but analyst estimates for the report have been moving lower in recent months. If you think Wall Street's too pessimistic, keep in mind that it overestimated the chain's bottom line in two of the three previous quarters. With PS5 system sales being the only reason sales didn't suffer a double-digit decline -- and consoles being GameStop's lowest-margin category -- there isn't going to be a lot to like in the report. GameStop will try to spin things with promises of shaking things up, but a splash of financial reality may be cruel for the stock on Wednesday and beyond.
2. American Airlines
If I thought American Airlines was overvalued a week ago, when it was hitting new 52-week highs, I can assure you I'm even more convinced that it's a stock to avoid a 7% increase over the past five trading days. Air carriers are moving higher as we make headway on the COVID-19 crisis, but the portrait isn't as rosy overseas, with global cases moving higher again. It's going to take years before airlines have a chance to return back to normal, and American Airlines is one of the industry's weaker players.
The shocking stat is that as a result of taking on new debt and issuing more stock we find American Airlines trading at an enterprise value above $50 billion. At the beginning of last year the shares were trading a bit higher than they are right now. The 52-week highs it's hitting now have the advantage of lapping the start of the pandemic shutdown with travel stocks starting to swoon since late February of last year. There were no COVID-19 fears, and we were in an expanding economy. American Airlines had an enterprise value of $41.6 billion. Under what scenario is American Airlines a better company now than it was in the months before the pandemic became a globe-rattling reality? I also can't be the only one watching aviation fuel prices heading higher again.
3. Danimer Scientific
We live in a world of waste, and Danimer Scientific's proposal hits all of the right eco-friendly tones. It provides a better mouse trap for the plastic bottles, straws, and bags that linger seemingly forever in landfills and oceans. Danimer's oil-based polyhydroxyalkanoates (PHAs for short) offer a plant-based plastic that breaks down easier than traditional plastics.
Major brands have turned to Danimer's Nodax, but will the environmental claims hold up? The Wall Street Journal ran a critical article over the weekend, leaning on several experts on biodegradable plastics. They believe that the positive benefits of Nodax are exaggerated, if not misleading.
It won't take long for Danimer Scientific to argue its side of the story. It reports fourth-quarter results next Monday, its first report as a public company. Danimer has seen its revenue grow nearly 50% higher through the first nine months of 2020, and next week's report should show more of the same. The challenge now becomes to refute the critics, as customers won't be paying a premium for Nodax if its biodegradable claims start to biodegrade.
If you're looking for safe stocks, you aren't likely to find them in GameStop, American Airlines, and Danimer Scientific this week.
