A big challenge when it comes to buying stocks in a bear market is determining which ones are good buys, and which stocks you're better off steering clear of right now. Three stocks that I'm not convinced are buys yet -- even at their reduced prices -- are Biogen (BIIB -0.14%), Twitter (TWTR), and Costco Wholesale (COST 0.84%).
1. Biogen
Even before Biogen announced last month that it was effectively giving up on its Alzheimer's treatment, Aduhelm, it already looked like a stock destined for a steep sell-off. The controversial treatment may have convinced the Food and Drug Administration that it was effective, but many health officials disagreed and some doctors even refused to prescribe it. Revenue of just $2.8 million from Aduhelm through the first three months of 2022 was already a huge disappointment as the writing looked to be on the wall.
Unsurprisingly, the stock has been falling sharply over the past year, down more than 50%, while the S&P 500 declined by only 12%.
But for a company facing losses in exclusivity, growing competition, and no catalyst to turn its business around -- besides just a pipeline that may or may not pan out -- the stock has all the makings of a value trap. Its forward price-to-earnings (P/E) multiple of 12 may look cheap, compared to the Health Care Select Sector SPDR Fund average of 15 times future profits, but that will likely change as analysts update their forecasts for the stock.
A concerning trend is that both the company's operating margin and revenue have been declining over the past five years:
BIIB Operating Margin (Quarterly) data by YCharts.
If those trends don't improve drastically, the stock could still prove to be an expensive buy, even at its currently reduced price.
2. Twitter
I wasn't a fan of Twitter's stock when it had a part-time CEO in Jack Dorsey, who also managed fintech company Block. Now, with the potential of an even more volatile part-time leader in Tesla's Elon Musk, there's no more reason to be bullish on the stock than there was before. Twitter needs significant changes, which require a CEO's full attention.
Musk has been critical of the fake accounts on the social networking site, saying there are too many of them on the platform, and seemingly using that to justify second-guessing his decision to acquire the company. With those fake accounts come bots, fake news, and all the other problems that plague many other social media companies.
However, Twitter has the added problem of also not being consistently profitable. Although the company has been growing, the profits haven't always been there. Over the trailing 12 months, Twitter has reported net income of just $224 million on revenue of more than $5.2 billion. Low operating margins have made it difficult for the business to stay out of the red:
TWTR Revenue (Quarterly) data by YCharts.
With so many problems, Twitter's 39% share-price decline over the past year just isn't enough to make the stock worth the risk. Although analysts are optimistic the company will remain profitable, at a forward P/E of 32, that's still a steep multiple to pay for this troubled stock; rival Meta Platforms is only trading at 14 times its future profits. Without more of a decline in the price, investors are better off avoiding Twitter.
3. Costco
Costco has been a strong retail stock to own over the years. Amid lockdowns and restrictions during COVID-19, it continually generated strong results. In the company's fiscal year ending August 29, 2021, revenue of $195.9 billion rose by 17% from the previous year and was more than 28% higher than 2019's tally.
Costco's business has been booming, and of the three stocks listed here, it's definitely the best. However, the problem with Costco is its valuation. It's trading like a fast-growing stock even though that's not where it belongs. At a forward P/E of 34, its valuation is higher than Twitter's and Meta's. Although the company has been delivering some solid double-digit growth in revenue, that's too high of a premium to be paying for the retail stock.
Historically, the company simply hasn't been growing this rapidly in the past:
COST Revenue (Annual YoY Growth) data by YCharts.
Inflation could make it difficult for the company to sustain this type of growth, and I'm not optimistic that it will be able to do so. And as that growth inevitably slows down, there could be more of a correction in Costco's share price. Although it's down more than 20% in 2022, over the past 12 months, it's still up by 18%.
Be careful with Costco because while it's performing well, the premium the stock commands is rather high.
