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3 Stocks to Avoid This Week

By Rick Munarriz – Oct 25, 2021 at 8:15AM

Key Points

  • Digital World Acquisition was a nine-bagger last week. Selling into the hype on SPAC deals is usually the right call.
  • Pinterest reports financial results this week, and a bad report may make it less attractive a buyout candidate.
  • PetMed Express hasn't posted double-digit growth in 12 years. It's still going to the dogs.

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These investments seem pretty vulnerable right now.

I've been picking stocks to avoid every week, singling out names with a lot to prove in the coming days. My three stocks to avoid last week were on the move -- up 6%, down 1%, and down 4% -- averaging out to a 0.3% increase.

The S&P 500 rose 1.6% for the week, so I was the relative winner on my bearish calls. This week I see Digital World Acquisition Corp. (DWAC 2.75%), Pinterest (PINS 0.96%), and PetMed Express (PETS 2.12%) as vulnerable investments in the near term. Here's why I think these are three stocks to avoid this week.

Seated dejected person with question marks on the wall.

Image source: Getty Images.

Digital World Acquisition

One of last week's biggest winners was Digital World Acquisition. The SPAC -- or special purpose acquisition company -- closed below last month's IPO price of $10 a share on Wednesday afternoon. It exploded higher in the final two trading days after announcing that it would be joining forces with Donald Trump's new media company venture. Trump Media & Technology Group said it plans to launch a new social networking platform called Truth Social in the coming months.

Singling out Digital World Acquisition as a stock to avoid isn't political commentary. We don't do that here. If anything, polarizing media empires sometimes carve out thin but dedicated and passionate followers. The problem is that the stock more than quadrupled on Thursday, only to double on Friday. The stock soared a scintillating 846% in just a pair of trading days.

What happens next? We've seen a lot of SPAC deals pop on hot combinations, only to give back most of those gains. Reality often fails to live up to the hype, and sometimes folks hopping on the headlines don't realize the dilution and financial breakdown of SPAC combinations.   

Pinterest

Another proposed pairing that made waves last week -- but this one without confirmation -- was a report that PayPal (PYPL 2.16%) was negotiating to buy Pinterest in a mostly stock deal that would value the visual search engine at $70 a share.

PayPal investors hated the chatter, sending the stock nearly 12% lower on the news in the three subsequent trading days. If PayPal had made an all-stock offer for $70 on Tuesday -- and, again, there's nothing official from either side -- it would be worth less than $62 right now.

Aside from the potential buyout offer that the market doesn't seem to like, Pinterest reports quarterly results on Tuesday. It disappointed investors by posting a sequential decline in total active users last time out. It also clocked in with both quarter-over-quarter and year-over-year slides in domestic active accounts. Revenue is growing briskly on the strength of improving monetization, but if usage keeps sliding, it will be hard to get retail investors or a larger suitor to get excited in Pinterest. 

PetMed Express

It's easy for growth and income investors to fall into the PetMed Express trap. The mail-order provider of pet medications seemingly offers a reasonable play on the dog and cat adoptions that exploded last year when the pandemic began. PetMed Express also offers a generous dividend of 4.4%. It may seem like the perfect combo until you realize how poorly the business itself is faring these days.

PetMed Express has fallen short of Wall Street profit targets in back-to-back quarters, and that's an unfortunate trend that could eat into payout growth. Analysts also see revenue declining 5% this fiscal year. 

This isn't a growth stock. You have to go back to fiscal 2009 to find the last time PetMed Express posted double-digit growth. Even now, when the humanization of pets trend finds more of us treating our furry friends like members of the family, we're not turning to PetMed Express to keep our beloved canines and felines medicated. It reports financial results for its fiscal second quarter after Monday's close. It's hard to get excited after recent misses and a lack of growth. 

If you're looking for safe stocks, you aren't likely to find them in Digital World Acquisition, Pinterest, and PetMed Express this week.

Rick Munarriz owns shares of Pinterest. The Motley Fool owns shares of and recommends PayPal Holdings and Pinterest. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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