Three Toxic Stocks You Need to Dump Immediately
Maybe more than any other field, tech companies were the biggest winners of the decade-long bull market that started in the late 2000s and early 2010s. I call it the Age of Irresponsibility, because a lot of these firms took advantage of the ability to borrow money at near-zero interest rates and summoned giant piles of capital to fund research and development projects.
While some eventually turned those into legitimate, money-making business lines that produce something customers actually buy, many others have sailed by on rising debt. They continue to borrow indefinitely while enjoying soaring valuations based on the speculative value of the alleged technology they may eventually produce.
If that sounds like BS to you, well… that’s because it is. And the worst part is, many of these companies have become Wall Street darlings, continually making the rounds in “Best 5 Tech Stocks to Own” lists and analyst recommendations.
There’s no other way to say it: those people are all lying to you.
What those companies actually are is toxic, and they will take down any investment portfolio instantly as soon as the proverbial bill comes due. Whether it’s your mutual fund, 401k, pension account… the two-fisted punch of rising interest rates and inflationary price movement on everything from energy to commodities to freight will drop these companies like dead weight, taking your wealth with them.
Fortunately, they’re easy to spot if you look in the right place, and there are two things in particular I pay attention to: negative profit margins and high debt-to-equity ratio (D/E).
That first one is a no-brainer – companies that don’t make money have no way to offset their expenses in a high interest rate environment. The second takes a little more explaining.
A company with a high D/E has much more debt than it has assets. That means they’re extremely dependent on debt and overleveraged – so much so that they may not be able to get out of it except through bankruptcy. One way to look at it is this: equity is owned by shareholders like you, and debt is owned by banks and financial institutions.
So if a company is primarily owned by a bank, who do you think they’re going to prioritize when push comes to shove?
Like I said, toxic.
I’ve got three of these picked out for you. Again, they’re Wall Street darlings – widely praised and widely owned – and they could very well destroy your livelihood when they fall. Don’t hold onto them even a minute longer.
Toxic Stock #1: Impinj Inc. (PI)
Our first loser is a company out of Seattle, Washington that makes RFID chips and readers, as well as the software for encoding them.
RFID is one of the most widely used technologies in the world. It’s in everything from the tags that track livestock to employee ID badges to passports. You’d think that any company making these, especially one with 23 years in the business, would be making hand-over-fist money for shareholders. And if you look at a 1-year chart for their stock, that 88% gain probably seems real good, right?
Think again. -15.4% profit margin last quarter. Trailing 12-month (TTM) operating income of -$19.5 million. -$11.4 million free cash flow over the same period.
And their TTM debt load? So, before I tell you this, understand that generally speaking, the D/E that defines a “safe” investment is somewhere below 2.
Impinj’s debt-to-equity ratio is 1,141,140.38. Meaning literally that for every dollar of equity they have, they have a corresponding $1.14 million in debt.
There’s overleveraged, and then there’s being a bona-fide debt junkie. When the bill comes due on these guys, they’re going to sink like a stone. Insiders are already dumping it, having sold off $571k worth of it in the last year.
Do yourself a favor and join them.
Toxic Stock #2: Coupa Software Inc (COUP)
This San Mateo, California company makes a cloud-based software solution helping companies improve their spend analytics – essentially, tracking expenditures and reducing wasteful spending. It boasts clients like Rivian and Uber in its press releases, and is considered one of the largest supply chain management companies in the world, with a market cap somewhere north of $6 billion.
Its balance sheet is held together by a prayer and a song, and I’m astounded – given the dire need for supply chain management solutions, how does a company like this not make money? But the numbers don’t lie, and what I’m seeing here really stinks. TTM profit margin of -38.96%, -$272 million operating income, -$337 million available to common shareholders, and a D/E of 450.98.
Anyone who was holding onto this last year has been experiencing some real pain as Coupa’s financing costs have increased, and the stock is currently down about -37% from where it was a year ago. Investors hoping for a rebound here are bound to be disappointed – the stock hit $78.65 on Dec 12 last year, down from its 52-week high of $130.97, and has essentially flatlined, having barely moved since the beginning of the year.
A rally that lifts up the whole market might push this stock around a little, but it’s dead in the water for all practical intents and purposes. Kick it to the curb.
Toxic Stock #3: Cloudflare Inc (NET)
Cloudflare’s business value proposition has always been extremely simple since it started in 2009. Websites are expensive for any business to host and maintain, requiring an expenditure both in constantly updated equipment and the personnel needed to run and use that equipment. Cloudflare provides those services for a fraction of that cost, and its security protocols are considered one of the Internet’s best defenses against distributed-denial-of-service (DDoS) attacks on websites. It enjoys a market cap somewhere north of $22 billion and is a household name in their field.
So it might come as some surprise to you that since its IPO in 2019, its stock has been hammered down to -70% off of its record highs. Why, you might ask? Because it’s bleeding cash like a stuck pig.
About the only good thing I can say about this company’s financials is that it’s not as overleveraged as my other two picks, with a trailing 12-month D/E of only 271.69 (again, a “safe” bet is less than 2). But everything else looks like garbage: -$201 million in operating income, -$193 million net income available to common shareholders, -16.72% profit margin last quarter (which is a 73.09% improvement year-over-year)… yet another high-growth company that makes no money.
A slight improvement in slowing down the growth of their operating expenses has catapulted them to the top of several analysts’ “buy” lists, but I would stay very far away from it. Rising interest rates will make it harder to keep expenses down, and that huge valuation makes them extremely vulnerable to investor sentiment. All it’ll take is one bad day in the news to send Cloudflare straight into the gutter.
You don’t want to be holding onto it when that happens, trust me.
Chief Investment Strategist, Money Morning