In my three stocks to avoid article last week, I predicted that Alteryx (NYSE: AYX), Cedar Fair (NYSE: FUN), and Grayscale Digital Large Cap Fund (OTC: GDLC) would have a rough few days.
- Alteryx stock retreated 5% for the week. Shares of the cloud-based provider of enterprise analytics did initially move higher after it posted better-than-expected quarterly results, but it slipped during the balance of the week.
- Cedar Fair dropped by 2% last week. Earnings season didn't help the operator of regional amusement parks, and its shares have declined in the last four trading days.
- Finally, there was Grayscale Digital Large Cap Fund. The exchange-traded fund that owns stakes in five leading cryptocurrencies soared 14% last week. It was a great week for digital currencies, and Grayscale soared despite its stiff premium to its net assets. That was enough to sink what was otherwise a good list of stocks to avoid.
Those three stocks averaged a 2.3% gain for the week. The S&P 500 rose 1.2%, a little more than half the combined return of the three stocks I warned investors away from. I was wrong. Let's see if I can get back on track. Right now, I see Wendy's (NASDAQ: WEN), Celsius Holdings (NASDAQ: CELH), and Grayscale Digital Large Cap Fund as vulnerable investments in the near term. Here's why I think these are three stocks to avoid this week.
Flipping burgers isn't as glamorous as it used to be, and later this week, we'll see how Wendy's is holding up in the current operating climate. The largely franchisee-driven chain of 6,800 restaurants reports earnings on Wednesday morning, and there are a few reasons to be cautious.
The good news is that Wendy's didn't take long to turn things around in the pandemic. Comps growth returned in the second half of last year. The company also came through with healthy initial sales through the first few weeks of the quarter that it will discuss before Wednesday's market open. However, there are some potential hiccups here. Wendy's fell short of Wall Street's profit target last time out despite the positive comps, and analysts have been inching their bottom-line forecasts for 2021 and 2022 lower.
There are also some issues simmering beneath the surface in the fast-food industry. It's not easy running restaurants these days, and Wendy's largest franchisee had to find a buyer after filing for bankruptcy last summer. The historically low-paying quick-service segment is also struggling to attract workers. Wendy's may simply be collecting franchising royalties and fees, but eventually, cracks in the business model will impact the concept owner.
2. Celsius Holdings
Another stock that may stumble after it reports earnings later this week is Celsius Holdings, a fast-growing distributor of "functional beverages." Celsius offers fruit-flavored canned sparkling water that when combined with exercise is clinically proven to improve one's metabolism and help burn body fat. With gyms starting to open up again, this may seem like a smart way to play the reopening of the economy, but the company's growth decelerated sharply in 2020's fourth quarter.
The stock took a 22% hit when it reported those Q4 earnings in early March, and that's pretty much where it is now heading into Thursday morning's financial update. Investors were concerned with a sequential dip in revenue for the quarter. Analysts are predicting a return to sequential top-line growth, continuing profitability, and accelerating year-over-year gains, but a lot can still go wrong this week. Celsius trades at 27 times trailing revenue, and you rarely find beverage companies fetching sales multiples higher than the single digits.
3. Grayscale Large Cap Digital Fund
Grayscale Large Cap Digital Fund sank my battleship last week with its market-thumping 14% gain. Grayscale runs a couple of attractively priced trusts dedicated to individual cryptocurrencies, but this is its first foray into a diversified exchange-traded fund. Grayscale Large Cap Digital Fund owns stakes in five different cryptocurrencies.
The problem with Grayscale Large Cap Digital Fund -- beyond its hefty 2.5% annual fee -- is that it closed out last week valued at a 16% premium to its net assets. It was fetching a still-high 12% markup a week earlier. In other words, the fund rose a lot faster than the value of the cryptocurrencies it owns last week.
The irony here is that Grayscale's two largest single-currency trusts trade at discounts that actually widened last week. Those two digital currencies make up more than 95% of the Grayscale Large Cap Digital Fund's assets, and its trusts dedicated to them specifically are trading for 2% to 13% less than their net asset values. They were discounted by 1% and 10% a week earlier. Cryptocurrency is as promising as it is risky. There's no reason to pay a premium for exposure to digital assets.
If you're looking for safe stocks, you aren't likely to find them in Wendy's, Celsius Holdings, and Grayscale Large Cap Digital Fund this week.