A big challenge when it comes to buying stocks in a bear market is figuring out which are good buys and which stocks you’re best off avoiding right now. Three stocks that I’m not yet convinced are buys – even at their discounted prices – are biogenic (IBIB 1.59%), Twitter (TWTR 2.07%)and Wholesale Costco (COST 0.88%).
Even before Biogen announced last month that it was effectively forgoing its Alzheimer’s disease treatment, Aduhelm, it already looked like a stock destined for a big sell. The controversial treatment may have convinced the Food and Drug Administration that it worked, but many health officials disagreed and some doctors even refused to prescribe it. Aduhelm’s earnings of just $2.8 million in the first three months of 2022 were already a huge disappointment as the writing seemed to be on the wall.
Unsurprisingly, the stock has fallen sharply over the past year, down more than 50%, while the S&P500 decreased by only 12%.
But for a company facing exclusivity losses, growing competition, and no catalyst to turn around its business — other than just a pipeline that may or may not materialize — the stock has all the makings of a value trap. . Its price/earnings (P/E) multiple of 12 may seem cheap, compared to the SPDR Healthcare Sector Fund average of 15 times future earnings, but that will likely change as analysts update their forecasts for the stock.
A worrying trend is that the company’s operating margin and revenue have declined over the past five years:
If these trends don’t drastically improve, the stock could still prove to be an expensive buy, even at its currently discounted price.
I wasn’t a fan of Twitter stocks when it had a part-time CEO in the person of Jack Dorsey, who also ran a fintech company. To block. Now, with the potential for an even more volatile part-time leader in You’re here‘s Elon Musk, there is no more reason to be optimistic about the title than before. Twitter needs big changes, which require a CEO’s full attention.
Musk criticized the fake accounts on the social networking site, saying there were too many on the platform and apparently using them to justify his decision to acquire the company. These fake accounts come with bots, fake news, and all the other issues that plague many other social media companies.
However, Twitter has the added problem of not always being profitable. Although the company has grown, the profits have not always been forthcoming. Over the past 12 months, Twitter reported net income of just $224 million on revenue of over $5.2 billion. Low operating margins have made it difficult for the company to stay out of the red:
With so many problems, Twitter’s 39% drop in share price over the past year just isn’t enough to make the stock worthwhile. Although analysts are optimistic the company will remain profitable, at a forward P/E of 32, it is still a high multiple to pay for this struggling stock; rival Metaplatforms only trades at 14 times future earnings. Without more price declines, investors would be better off avoiding Twitter.
Costco has been a solid retail stock to own over the years. Amid lockdowns and restrictions during COVID-19, it has continuously generated strong results. In the company’s fiscal year ending August 29, 2021, revenue of $195.9 billion was up 17% from the prior year and was more than 28% higher than the 2019 tally .
Costco’s business is booming, and of the three stocks listed here, it’s definitely the best. However, the problem with Costco is its valuation. It trades like a fast-growing stock, even if it doesn’t belong there. With a forward P/E of 34, its valuation is higher than that of Twitter and Meta. While the company posted solid double-digit revenue growth, that’s too high a premium to pay for retail stock.
Historically, the company simply hasn’t grown that fast in the past:
Inflation could make it difficult for the company to sustain that kind of growth, and I’m not optimistic about its ability to do so. And as that growth inevitably slows, there could be a bigger correction in Costco’s stock price. Although it has fallen by more than 20% in 2022, in the last 12 months it has still increased by 18%.
Be careful with Costco because even though it works well, the premium that the stock commands is rather high.