When you're in the market for some stocks for your portfolio, it's easy to focus on ultra-popular stocks. They're likely to be ones you hear and read about the most, after all. And many of them have been great performers -- which is why they've become popular.
But you might want to be cautious with certain popular stocks, for various reasons -- such as their financial health, competitive strength, or valuation. Here are five companies to dig into more deeply before committing any of your hard-earned dollars.
1. Taiwan Semiconductor
Taiwan Semiconductor (TSM 2.82%) is a popular stock for good reason: Over the past 15 years, it has averaged an annual return of more than 20%. Over the past five years, it has averaged 26%. Wow. The company has a lot going for it, too, being the world's biggest contract semiconductor chipmaker.
NYSE: TSM
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But that's also a problem. Since so many companies depend on it, there has been movement to induce more competition. President Biden, for example, signed the CHIPS and Science Act into law in 2022, pouring tens of billions of dollars into expanding America's chip-making capacity.
Another concern is China, which might cause big trouble for Taiwan, such as if it invaded the island and/or tried to gain control of it. These factors are keeping me away from this stock, despite my admiration for it.
2. Tesla
Tesla (TSLA 3.33%) is another market darling, and one I'm staying far away from. The company has become a major player in the electric vehicle market, and recently delivered a record number of them. So why am I not eager to own shares of Tesla? Well, one reason is its CEO, Elon Musk. His management of Twitter, now called X, gives me little confidence that he will lead Tesla effectively. (He might, of course, but to me, it's a risk.)
NASDAQ: TSLA
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Another concern is competition. More automakers are making more electric vehicles, and they're typically priced lower than Tesla machines. And while Tesla also has significant operations in batteries and solar power, those industries are also changing, with prices falling -- which will likely put pressure on Tesla's performance.
Tesla has lots of fans and it may well be an outstanding stock over the coming decades. But me, it's too risky.
3. Lululemon
"Athleisure" specialist Lululemon Athletica (LULU 1.66%) is a stock I'm avoiding for several reasons. For one thing, the fashion and apparel industry can be fickle, with popular brands sometimes falling out of favor. On Holding, for example, is growing in popularity. Apparel can be a tough industry to compete in, since it's relatively easy for newcomers to enter and compete. (It's much harder to launch a business building airplanes or semiconductors.)
NASDAQ: LULU
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Lululemon bulls may like how the company is expanding into new categories such as running and aiming to expand internationally, as well. But that means the company will be facing more competitors -- such as Nike -- and it's not clear how eagerly people in other countries will embrace Lululemon. (The company's foray into men's dress clothing appears to be doing well, though.) Meanwhile, the stock's valuation is on the steep side, with a recent forward-looking price-to-earnings (P/E) ratio of 32.
4. Wingstop
If you love wings, go ahead and buy a dozen from Wingstop (WING +0.16%). But think twice before buying stock in the company. My main issue with it is simply its valuation: Its price-to earnings (P/E) ratio was recently above 100 -- which is nosebleed territory. You might reasonably want to look at the forward-looking P/E instead, as that's related to expected performance, but that, too, is steep -- recently at 86.
This is still a stock I'd be happy to add to my portfolio -- at a lower price. The company has been executing well, with revenue up 26.4% in its third quarter and earnings per share soaring 53.3%.
5. Carnival
Carnival (CCL 3.37%), in its own words, is "the largest global cruise company, and among the largest leisure travel companies, with a portfolio of world-class cruise lines -- AIDA Cruises, Carnival Cruise Line, Costa Cruises, Cunard, Holland America Line, P&O Cruises (Australia), P&O Cruises (UK), Princess Cruises, and Seabourn." Impressive, right?
It's also been performing well lately, with its stock surging 130% in 2023. But there are concerns. For one thing, the company is loaded with debt, though it's working on paying that down. My biggest concern, though, is the possibility of another pandemic-related travel shutdown which would crush Carnival, at least temporarily.
These are the reasons why I'm steering clear of these stocks. It doesn't mean they're wrong for you, though. Much will depend on your risk tolerance, and on which risks matter to you. Fortunately, there are gobs of great companies out there, with attractive prospects and valuations.
