When searching for stocks, investors are typically trying to identify the companies that will be good investments. However, it's also important to identify the stocks that could be bad investments. This seems obvious, but may not be as simple as it sounds.
Some stocks make bad investments because they're bad businesses, and those are likely the easiest to avoid. More difficult is to identify the companies that may have great products, but still make bad investments. Here are three companies to avoid because they could sabotage your portfolio.
Stitch Fix
Once a darling of investors, Stitch Fix (SFIX 0.47%) has fallen on hard times. Trading for less than $4 today, Stitch Fix is down more than 97% from its early 2021 high of $106. One might be tempted to think this price crash means Stitch Fix is a bargain now, but the business results reveal some ongoing concerns.
The challenges for Stitch Fix start at the top. The company's founder, Katrina Lake, served as its CEO before stepping down in April 2021. Her successor struggled and Lake returned in January of 2022 as interim CEO. Now the company needs to spend time securing a permanent leader, taking time away from focusing on the business.
These leadership changes coincided with some significant changes in the direction of the business. After starting as a subscription clothing service where stylists send personalized apparel picks to customers, the business shifted more toward being a traditional e-commerce site where customers could pick their own curated clothing. Stitch Fix now has a renewed focus on stylized picks, coming full circle back to the company's roots.
The change in business focus seems to have put the brakes on business growth. Revenue in the most recently reported quarter was down 20% year over year. This continued a streak of five consecutive quarters of negative revenue growth. The news hasn't been much better on the customer acquisition and monetization fronts. Active clients decreased 11% and net revenue per active client dropped 9% year over year.
To be fair, there have been some slowly improving metrics over the past few quarters, but as long as revenue and customer acquisition are heading in the wrong direction, it's difficult to see how this is a winning investment from here.
Coinbase
Considering the recently discovered alleged frauds in the cryptocurrency world, Coinbase Global (COIN 5.68%) seems like a glowing example of what the world of crypto could be. It is a publicly traded company with audited financials and reasonably steady stock performance over the past year.
And yet the crypto exchange faces some challenging times. In early June, the Securities and Exchange Commission (SEC) charged Coinbase with operating as an unregistered securities exchange. Essentially, the SEC thinks most cryptocurrencies are securities, and therefore Coinbase would need to register as a securities exchange. This will likely loom large over the company for the foreseeable future, making shareholder returns uncertain.
Turning to the business, there are also some headwinds to be aware of here, too. Coinbase makes money when its customers trade crypto on its platform. With the crypto hype cycle now behind us, Coinbase's transaction revenue has fallen significantly. In Q1 of 2023, Coinbase reported $375 million in total transaction revenue. While that number was up 23% sequentially, it was down 68% from Q1 of 2022, demonstrating how far interest in crypto has fallen over the past year.
With the uncertainty around the SEC charges and continued levels of decreased crypto trading, Coinbase is a stock to avoid for the time being.
Celsius Holdings
Unlike Stitch Fix and Coinbase, energy drink maker Celsius Holdings (CELH 2.12%) is absolutely crushing it. Revenue in Q1 was up 95% year over year and the company grew its net income more than 400% over the year-ago quarter. A new distribution deal with PepsiCo should only help get more Celsius products in front of more customers.
So why could Celsius sabotage your portfolio? It's simple. With its amazing success, Celsius has also seen its stock price soar to heights it will be difficult to surpass. Celsius currently trades for 15 times sales and 154 times free cash flow. For a consumer goods energy drink company, those are nosebleed valuations.
Current shareholders are very happy with this as it means their shares have appreciated impressively. However, investors who buy shares now could be in for disappointment as it would take a long run of equally impressive results to justify today's valuation. Revenue growth of nearly 100% isn't sustainable, yet the stock is being valued as if it is.
Celsius is a great business and a compelling case can be made that it will put up strong results moving forward, but price does matter for shareholder returns. Buying Celsius now could do more harm than good to your portfolio.
