Invariably, with the Federal Reserve forced into the unenviable task of taking away the monetary punch bowl, certain stocks to avoid would come up based on mass layoffs. Effectively, the earlier response to the coronavirus pandemic led to a dramatic rise in the real M2 money stock. However, inflation didn’t become particularly pronounced until people started spending the “extra” cash.
Of course, that’s what happened as the global economy gradually began reopening. In 2022, the velocity of money stock shot higher, initially juicing commercial activity. Predictably, though, prices became too hot, leading to both poor consumer sentiment along with hawkish intentions from the Fed. Naturally, the circumstance led to job cuts, which then necessitated a discussion about stocks to avoid.
Research from high-level sources indicate that layoffs typically lead to lower productivity and profits. As well, they can negatively affect morale for remaining employees, sparking further productivity declines. Given the ugliness of the matter, it’s probably best that investors steer clear of these stocks to avoid.
Zillow (Z, ZG)
When it comes to stocks to avoid based on layoffs and their negative implications, Zillow (NASDAQ:Z, NASDAQ:ZG) is an easy name to forward. Following its failed attempt at moving into the iBuyer business – where entities leverage technology to flip homes for profit – Zillow really brought problems into its own house.
Essentially, as Wired.com pointed out, the iBuyer model could be a canary in the economic coal mine. While flipping homes may work well during decidedly bullish market environments, they don’t do well when prices suffer consistently decline. Tack on higher interest rates that erode collective affordability and you have a serious problem on your hands.
Financially, I’m concerned about the company’s negative profit margins. If rates continue to rise throughout this year, then home sales will likely plummet. In that case, Zillow won’t have the opportunity to right the ship. And management probably believes the same when it laid off roughly 5% of its workforce in October last year. Thus, it’s one of the stocks to avoid.
Peloton Interactive (PTON)
Another easy name to identify for stocks to avoid, home-exercise equipment specialist Peloton Interactive (NASDAQ:PTON) had its moment. That moment was one which society called the coronavirus. Unfortunately, fears of Covid-19 began fading since at least early 2022, if not earlier. And with that, so did enthusiasm for PTON stock.
In the trailing year, shares gave up nearly 63% of equity value. Regarding lifetime returns, data from Google Finance reveals that PTON hemorrhaged 54%, a staggering figure. Essentially, if you didn’t get off at the peak (or near it) of the see-sawing price action, you got blasted. To be fair, for the year, PTON gained 43%. It’s possible that speculation about a short squeeze could be driving shares higher.
Also, in the spirit of transparency, covering analysts rate PTON as a consensus moderate buy. Unfortunately, its financial picture overall pings very poorly. Combined with Peloton laying off a significant portion of their workforce, first in February then in October of last year, PTON represents one of the stocks to avoid.
Again, when it comes to stocks to avoid, companies like Carvana (NYSE:CVNA) offer an easy idea to introduce. Admittedly, some hesitancy exists in covering the topic of securities to sell because of the emotions (and money) involved. However, anybody willing to be objective about CVNA will likely arrive to the same conclusion. At best, it’s an extremely speculative investment. At worst – well, you can probably think of something yourself.
Essentially, Carvana suffers from a similar framework as Peloton. Back during the worst of the Covid-19 crisis, Carvana enjoyed significant relevance. With few people willing to take public transportation, demand existed for contactless transactions for personal vehicles. Now that fears of Covid-19 faded, few customers are willing to pay the premiums associated with vehicle-to-home deliveries.
Indeed, the financial picture tells everything you need to know. Carvana features a poor balance sheet, with an Altman Z-Score of 1.28 reflecting a distressed enterprise. Not surprisingly, profitability metrics fell into negative territory. Frankly, CVNA easily makes for a case of stocks to avoid.
Earlier this month, video services platform Vimeo (NASDAQ:VMEO) announced rather unsurprising news: management stated that it would cut 11% of its workforce, citing various macroeconomic pressures. Moreover, it wasn’t the first time that the company underwent a headcount reduction recently. In July last year, Vimeo slashed its employee roster by 6%.
Moreover, Wall Street spared no thought about dumping VMEO shares during these troubled months. In the trailing year, shares gave up 74% of equity value. Further, one can’t help noticing that the company launched its initial public offering at an inopportune time in the spring of 2021. While circumstances back then looked great, last year’s soaring inflation did a number on the underlying business.
Still, contrarians will point out that Vimeo enjoys a consensus moderate buy rating. As well, the average price target among covering experts stands at $7.50, implying nearly 96% upside potential. Plus, the company carries no debt, affording it fiscal flexibility. Nevertheless, VMEO ranks among the stocks to avoid based on broader business concerns. Under a troubled environment, video services may be one of the easy expenses to cut among enterprise-level clients.
Another company that performed remarkably well during the worst of the Covid-19 crisis, DocuSign (NASDAQ:DOCU) facilitated contactless services through its e-signature platform. However, like the other stocks to avoid that benefitted from Covid’s unique fear trade, declining anxieties over the SARS-CoV-2 virus spelled doom for the enterprise.
Really, the price action in the chart says it all. In the trailing year, DOCU dropped over 55% of equity value. At the peak of its popularity in 2021, DocuSign commanded an average weekly price of over $300. At time of writing, shares trade hands for under $60.
To be fair, recent market momentum saw DOCU gain 2.8% for the year. However, this rates conspicuously lower than the S&P 500’s performance of over 4% during the same period. And while sentiment among hedge funds rate as very positive right now, these institutional investors trimmed their exposure to DOCU substantially since the fourth quarter of 2021. In Sept. of last year, DocuSign laid off 9% of its workforce. With fading relevance, it’s one of the stocks to avoid.
One of the names among stocks to avoid that I don’t feel happy about mentioning, Lyft (NASDAQ:LYFT) under normal circumstances offered a bright narrative. Competing with industry stalwart Uber (NYSE:UBER) in the ride-sharing sector, Lyft never had Uber’s massive footprint. But because it was less aggressive, the financials undergirding LYFT stock presented a more palatable profile.
Unfortunately, that might not be the case anymore. With so much competition for fewer remaining consumer dollars amid rough economic environment, Uber might utterly dominate the ride-sharing business. As well, with Uber Eats – the company’s food-delivery service – the larger rival enjoys broader relevancies. Tellingly, in the trailing year, LYFT lost nearly 65% of equity value. During the same period, UBER shed 29%. Obviously, both suffered steep losses but one clearly ranks above the other.
In July of last year, Lyft laid off 2% of its workforce. However, I wouldn’t be surprised if more cuts materialize. With a poor balance sheet and negative earnings, the company has a mountain to climb.
Wells Fargo (WFC)
Last on this list of stocks to avoid is banking giant Wells Fargo (NYSE:WFC). On paper, banking firms appear to enjoy greater profitability because of higher interest rates. However, that’s only one side of the story. The other side is that higher rates disincentivizes borrowing because of the higher costs involved. Therefore, WFC and its big bank colleagues face significant questions.
At the moment, WFC shares fell 22% in the trailing year, which rates significantly worse than the benchmark equities index. As well, specific concerns exist about the company’s real estate business. A few days ago, I reported on management’s decision to downgrade the scale of its mortgage business. To market observers, this sounds a whole lot like layoffs are coming.
Indeed, Wells Fargo last year announced its total workforce shrank by about 14,000 people in the third quarter. Such a big drawdown in headcount suggests that the real estate segment suffers from significant demand issues. Therefore, it’s probably best to consider WFC as one of the stocks to avoid for now.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.