In just a few days, one of the most challenging years on record for investors will come to a close. The bond market may end up logging its worst year ever, while the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all entered bear markets at one point or another in 2022.
Although bear markets have historically represented the ideal time for opportunistic investors to do some shopping, it's important to recognize that not every perceived discount will prove to be a bargain. As we get ready to move into a new year, five ultra-popular companies with glaring red flags stand out as stocks I'd sell right now.
Image source: Getty Images.
Tesla
The first stock I believe investors would be wise to pare down or outright sell right now is electric vehicle (EV) manufacturer Tesla (TSLA +3.93%). Tesla made last year's list of stocks I'd sell right now, and it's declined 65% on a year-to-date basis. But I don't believe it's anywhere close to a bottom.
To begin with, Tesla isn't immune to the issues that are plaguing the auto industry. Persistent supply chain issues, possible provincial lockdowns in China tied to COVID-19, and historically high inflation are headwinds all automakers are contending with. Tesla is facing these same demand and production struggles, and we're beginning to see evidence of this weakness as discounting of its EVs ramps up.
To add to the above, Tesla's energy and solar business continues to lose money. Though optimists like to point to Tesla as being "more than a car company," the fact of the matter is that its profits are entirely dependent on its auto operations. In 2023, the company's auto segment should face serious margin compression.
But the biggest issue with Tesla is its CEO, Elon Musk. Even though Musk is a visionary that built Tesla from the ground up to mass production, he's become a clear operating, legal, and financial liability for the company. The vast majority of Musk's innovation timelines aren't being met, and his side-project acquisition of Twitter appears to be distracting him from running the largest auto company in the world by market cap.
OTC: BBBY
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Bed Bath & Beyond
Another widely owned stock I'd give the heave-ho to for 2023 is home furnishing retailer Bed Bath & Beyond (BBBY +0.00%). Though it's been a popular short squeeze stock, the company's operating performance and corporate bonds spell big-time trouble ahead.
Like a number of brick-and-mortar-focused retailers, Bed Bath & Beyond has had its lunch eaten by online retailers that have the ability to undercut traditional retailers on price. Bed Bath & Beyond hoped to overcome this by modernizing its supply chain and putting differentiated products in its store. Unfortunately, the company's product assortment hasn't been a draw for consumers who, in large part, continue to choose online competitors that can offer lower prices. As a result, comparable-store sales plummeted 26% in the quarter ended Aug. 27, 2022.
The company's balance sheet also serves as a warning. When the fiscal second quarter came to a close in late August, Bed Bath & Beyond had $135.3 million in cash and cash equivalents left, which compared to $1.73 billion in long-term debt. What's more, it wasn't clear at the time if the company would have enough capital to cover its liabilities over the next 12 months.
The bond market has been pretty skeptical, too. Although the company introduced an offer to exchange its 2024, 2034, and 2044 senior debt lots for new convertible notes, the 2024 and 2044 notes were respectively trading at 85% and 90% below par ($0.15 and $0.10 on the dollar) prior to this exchange. Such levels indicate a high probability of future insolvency.
Image source: Getty Images.
Netflix
The third extremely popular stock I'd suggest selling is streaming giant Netflix (NFLX 0.91%). Even though Netflix is profitable on a recurring basis at a time when other streaming platforms seem to be hemorrhaging money, there are plenty of red flags heading into the new year.
There was once a time when Netflix appeared to be miles ahead of its streaming competition. While it still has an impressive library of original content, Netflix's domestic and international streaming market share has been shrinking. As competition picks up and Netflix cracks down on password sharing, consumers will have far more choices for content.
Perhaps the more concerning issue for Netflix is the company's cash flow. For years, Netflix has spent a small fortune expanding its reach into international markets. Until a few years ago, this was a company that burned more money than it generated from its operations every year. But even though it's now cash-flow positive, Netflix still isn't generating a lot of cash.
With U.S. and global economic growth slowing, as well as COVID-19 vaccines getting people back to their pre-pandemic daily lives, subscriber growth prospects for Netflix look mediocre, at best. For a company valued at a seemingly astronomical 42 times Wall Street's forecast cash flow for 2023, this looks like a recipe for disappointment.
NASDAQ: MRNA
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Moderna
A fourth popular stock I'd sell right now is biotech stock Moderna (MRNA +11.64%). This big pandemic winner looks set to completely lose its luster in the new year.
On the bright side, Moderna's mRNA-based COVID-19 vaccine, Spikevax, helped to completely change the game in the U.S. and abroad. This year, Moderna will recognize between $18 billion and $19 billion in advanced purchase agreements and is expected to generate more than $21 per share in profit, based on Wall Street's consensus. This comes after a $28.29 per-share profit in 2021.
The bad news is that COVID-19 vaccines move from government purchases to the private market in 2023. While that could lead to better pricing power for Moderna's Spikevax, it almost certainly means increased competition and a big drop-off in revenue as the worst of the pandemic looks to have passed. With three vaccine developers hitting at least a 90% vaccine efficacy -- Moderna is one of those three -- competition will be fierce for booster shots moving forward.
The bigger problem for Moderna is that its cancer vaccine pipeline, while promising, is years away from contributing meaningfully in the sales column. This means Moderna is entering the new year with a market value of $76 billion, a forward price-to-earnings ratio of nearly 45, and a multiple of more than 8 times Wall Street's forecast sales. That's extremely pricey for a biotech stock with regulatory approvals in only one area of focus (COVID-19 infection).
NASDAQ: NVDA
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Nvidia
The fifth ultra-popular stock I'd sell right now is Nvidia (NVDA +1.73%). While Nvidia isn't a poorly run company, it's no longer the growth story that made it one of the most valuable companies in the world in 2021.
If there's a positive for Nvidia, it's that the company controls 80% of the discrete graphics card market. These are graphics processing units (GPUs) that operate separately from the processing chip. This dominance of discrete graphics cards can bolster the company's moneymaking gaming segment.
On the other hand, gaming revenue has absolutely fallen off a cliff in recent quarters (down 51% year over year in the fiscal third quarter). The blame may lie with COVID-19 vaccines allowing people to get back to their daily lives. Less time at home means less gaming.
However, Nvidia is also contending with an export ban on its A100 GPUs to China. These are some of the company's fastest GPUs that rely on artificial intelligence. Nvidia is circumventing this export ban by offering a slower GPU for export to China, but it's unclear if sales of this newer GPU will be anywhere close to what was expected of the A100.
During bear markets, valuations come into focus. Whereas most semiconductor stocks are trading at historically attractive multiples relative to their forward-year earnings or book value, Nvidia is still commanding a forward-year price-to-earnings multiple of 35. My suspicion is we'll see these profit forecasts fall considerably in 2023.
