Do you like bargains? Most people do, even when the discounted product in question is a stock.
A discounted stock, however, doesn't necessarily make that name worth buying. Sometimes, junk goes on sale, too.
With that as the backdrop, here's a rundown of the S&P 500's (^GSPC -0.22%) three worst-performing constituents last month, and a buy/avoid call for each.
May's worst of the worst
May might have been a mediocre month for the market; the S&P 500 only logged a tepid 0.25% gain. Several of its stocks ended the stretch well into the red, though. The worst-of-the-worst-performing of these large caps? Newell Brands (NWL -0.29%), Paramount Global (PARA 1.48%), and Advance Auto Parts (AAP 4.25%) shares fell 31.5%, 34.8%, and 42.1% (respectively) last month. Ouch!
Data by YCharts
Poor earnings reports are the culprit for the bulk of the weakness.
Take Paramount: Last quarter's top line of nearly $7.3 billion was not only down slightly on a year-over-year basis, but fell short of analysts' consensus estimate of $7.42 billion. Per-share earnings of $0.09 also missed estimates of $0.17, and were well down from the year-earlier comparison of $0.60 per share.
Profits are under so much pressure due to soaring costs linked to its streaming initiatives, in fact, that the media and entertainment company opted to slash its dividend. What was once a quarterly payment of $0.24 per share has been dramatically pared back to only $0.05 -- at least until the company can shore up its cost trouble.
Advance Auto Parts is also hitting a profit wall. The auto parts retailer's overall sales improved 1.3% last quarter, but thanks to higher inventory costs, gross profits tumbled 2.4%. Higher labor costs ate further into the bottom line, which fell from $2.26 per share in the first fiscal quarter of 2022 to only $0.72 per share this time around. And, given how last quarter's woes are likely to linger, Advance Auto Parts also dialed back its full-year sales and earnings guidance, with the profit outlook being nearly halved.
As for Newell Brands -- parent to Rubbermaid containers, Elmer's glue, Yankee Candles, and more -- it didn't release its first-quarter numbers during the month of May. It was still reeling from its troubling Q1 results posted in late April, however. While the sales decline of 24% wasn't quite as big as feared, that's still a huge setback. In the meantime, the quarterly loss of $0.06 per share was twice as big as analysts' expectations.
Bear in mind, however, that the first quarter is historically a tough one for the seasonally sensitive company.
Yes, yes, no
The question remains, however: Are any (or all) of these sell-offs buying opportunities?
Not to wax too philosophical, but sharp sell-offs aren't inherently a reason to buy anything. The key question to ask before making any investment in any stock is whether the underlying company is one you'd like to own for the long haul, regardless of the stock's recent price action. If it is, have at it.
The challenge to overcome in instances like these is figuring out if you're excited about being able to step into a quality company at a discount, or if you're just excited about the prospect of a sizable bounce in the near future. Your subconscious mind can definitely blur those lines.
When the picture gets fuzzy like this, the best first course of action to take is simply taking a step back and looking at the bigger picture: Does this company have a long-term track record of growth? Are the current headwinds clearly temporary, even if they're going to persist for a while?
Indeed, it's not even wrong to look at a stock's longer-term performance to make an informed decision. As rough as May was for Advance Auto Parts shares, for example, the stock's down a stunning 70% from its 2021 highs. Its current fiscal challenges may already be priced in, making last month's stumble unnecessary.
From this bird's-eye view, it's possible to make a smarter call on all three stocks in question. Advance Auto Parts is a buy. So is Paramount. Newell Brands isn't.
Yes, Advance Auto Parts still has much to figure out. Chief among its challenges is re-widening the gap between its costs and its prices; you know the metric as gross margin. Last quarter was something of a wake-up call for its management team, though.
While it will take a multiquarter effort to turn things around, a new CEO is in the works. That may well be the change-driving shake-up needed. The stock could start reflecting expectations of this change even before it starts happening.
Paramount is a slightly different story. Although the decision to cut its dividend was certainly a difficult one, it was also the correct one -- that money can be better spent in other ways right now.
The thing is, few investors owned Paramount shares for its modest dividend anyway. Its value and appeal is rooted in the fact that it's a pure entertainment content creator and direct distributor, and it isn't bogged down by being in the wrong business (such as being a cable TV service provider).
It, too, will take some time to fix. Paramount's got the right pieces of the puzzle in place though, with Paramount's movie and TV studios, streaming platform Paramount+, and AVOD platform PlutoTV. It just needs to keep tweaking the mix. Like Advance Auto Parts stock, shares of Paramount could perk up just on the reasonable expectation of a turnaround.
The only real bust among these three S&P 500 names is Newell Brands. While all of its brands are among the most respected in their respective markets, revenue's been stagnant -- at best -- since 2018. Ditto for earnings. Analysts don't see that changing over the course of the next couple of years, either. There are far more compelling prospects out there.
The bigger takeaway for investors, of course, is that every potential stock pick should be taken on a case-by-case basis. And a stock's recent price action (good or bad) shouldn't be your top consideration.
