The stock market seems uncertain right now. Some stocks experienced continued declines even after a massive sell-off in the 2022 bear market. Others recovered significantly in the first half of the year but reversed course in July and August as their financials failed to meet investor expectations.
Such times leave investors questioning the growth potential of many stocks. While many stocks still have excellent long-term prospects, each of us found stocks investors should consider avoiding. A closer look reveals why.
AT&T is a multiyear market laggard
Jake Lerch (AT&T): My pick for a stock to avoid right now is AT&T (T 1.02%). This telecom giant suffered a rough 2023, with a year-to-date total return of -19% -- and that's after accounting for its massive 7.9% dividend yield. What's worse, AT&T may have more trouble on the horizon. The company faces two main concerns, one financial and one legal.
On the financial front, AT&T remains saddled with a gigantic debt load -- nearly $136 billion of net debt. And while that figure is down significantly from its all-time high of $180 billion, it's still an albatross around the neck of this iconic company.
Moreover, the exploding cost of debt is weighing on AT&T. Just like individuals, higher interest rates impact companies. With the 10-year Treasury yield now at its highest level since 2007, the cost of funding debt is sky-high -- with no sign of relief anytime soon.
On the legal front, worries over lead-lined telephone cables put AT&T on the back foot. A recent investigative report raised concerns that AT&T might face huge costs to remove the wires. In addition, individuals or municipalities may file lawsuits if they allege they were exposed to toxic lead that leaked from the cables.
If AT&T does have to set aside money for cleanup and potential litigation, that would be bad news for investors. As noted earlier, AT&T is desperately seeking to improve its balance sheet by paying down debt while also maintaining its lucrative dividend. Granted, AT&T appears to have sufficient free cash flow to support its dividend, and the company is dirt cheap with a price-to-earnings (P/E) ratio of only 6.8.
That said, AT&T struggled for years to beat the market, so why should investors bet on this laggard now, with so much uncertainty swirling around the company?
Apple could fall further if the market falters
Justin Pope (Apple): It might feel counterintuitive to see a tech stalwart like consumer electronics giant Apple (AAPL -0.35%) on a list of stocks not to buy, but here it is. However, this is a numbers-based decision. Investors must face the math; the facts are that Apple is a humongous business that does more than $380 billion in annual revenue and has a market cap approaching $3 trillion.
Growing gets harder when you're a company moving massive numbers like Apple is. Apple's developed iPhone markets are saturated, and its new augmented reality headset, Apple Vision Pro, will launch very slowly. In other words, there isn't much to move Apple's growth needle in the short term, and revenue has begun declining since peaking last summer.
Shares have cooled in recent weeks but are still up nearly 40% in 2023, significantly stretching the stock's forward P/E. Analysts believe Apple's earnings-per-share (EPS) will grow by an average of 10% annually over the long term. That values the stock at a PEG ratio of roughly 3, which signals that Apple's stock is expensive for the growth investors should see moving forward.
AAPL EPS LT Growth Estimates data by YCharts.
Investors shouldn't be surprised if Apple's stock continues to slide if the markets become shaky enough to send investors looking for better deals elsewhere. That's why Apple is a stock you should avoid right now, but circle back on once the valuation makes a bit more sense.
AI may not be enough to rescue this bulk goods retailer
Will Healy (Wayfair): Wayfair (W 2.08%) may be one of the more surprising stocks of the summer. Its stock rose by almost 160% between late May and early August as investors became interested in its artificial intelligence (AI) and machine learning applications.
The furniture and home goods retailer uses automated catalog tagging empowered by AI to suggest products to customers. It also uses AI to supply delivery date estimates to customers, improving customer satisfaction.
Wayfair succeeded by carving out a niche in home furnishings once ignored by its largest rival, Amazon. A logistics network that could ship bulk goods, such as furniture, served as its competitive advantage, and it prospered during the pandemic when in-person furniture shopping was less of an option.
More recently, Wayfair bulls received positive news in other areas. News of order growth and positive second-quarter free cash flow of $128 million helped to boost the stock. Additionally, a price-to-sales ratio of 0.6 is well under that of Amazon, whose sales multiple is around 2.6.
Unfortunately for Wayfair, many of the challenges that led to the massive sell-off in 2022 remain with the company. Ultimately, shoppers often prefer to see furniture in person before making a purchase, a factor that does not work to Wayfair's advantage under normal business conditions.
Moreover, Amazon now competes in the furniture and home goods businesses. And worse, its success with AWS has made Amazon a leader in AI, leading investors to question whether Wayfair can stay competitive in this area.
Furthermore, even with more orders and positive free cash flow, the financials are less inspiring. Its net revenue for the first half of 2023 was just over $5.9 billion, a decrease of 5% compared with the same period in 2022.
Amid lower sales, Wayfair reduced its cost of goods sold and operating expenses. Still, its net loss for the first six months of the year came in at $401 million, and free cash flow remained negative for the same period.
Indeed, Wayfair benefits from a logistics network for bulk goods and a loyal customer base. But with competition becoming more of a threat and a reluctance among some to buy furniture and home goods online, it is hard to see how it is going to build sustainable growth.
