In today’s adverse market conditions, understanding when to sell stocks is as crucial as knowing when to invest. The focus here is on three companies that should be considered for potential divestment. Each of these companies faces unique challenges that signal potential trouble for investors.
Indeed, these companies have fundamental weaknesses. For instance, despite promising electric vehicle (EV) ambitions, one listed company grapples with operational inefficiencies that impact its bottom line. Another one, a once high-flyer in the video conferencing space, now contends with a concerning churn rate among its online customers, threatening its revenue streams. Meanwhile, the last one on the stocks to sell list struggles with declining sales and customer traffic despite efforts to enhance operational efficiency.
Learning about these challenges is pivotal to safeguarding portfolios. Whether it’s recognizing unsustainable production-to-delivery ratios or grappling with customer retention issues, these indicators provide critical insights into each company’s financial health and prospects.
Lucid (LCID)
Lucid (NASDAQ:LCID) designs and manufactures EVs in the luxury market segment. The company’s operational edge is in the discrepancy between production and deliveries. In Q1 2024, Lucid produced 1,728 vehicles but delivered 1,967. Meanwhile, this was its top quarter to date for deliveries, with a 39.9% year-over-year increase.
However, the lower production figure relative to deliveries was an active decision to be cost-conscious rather than a reflection of production bottlenecks. Hence, this indicates a cautious approach to managing production costs, suggesting underlying issues in scaling up manufacturing efficiently.
Additionally, the production-to-delivery ratio indicates that more than one vehicle was delivered for each produced. This is unsustainable in the long term and could point to inventory depletion or inefficiencies in production scaling. The cost of revenue in Q1 was $404.8 million, significantly exceeding the revenue of $172.7 million. This disparity suggests that the cost of producing each vehicle is substantially higher than the selling price. It is leading to negative gross margins.
To summarize, Lucid is on the stocks to sell list due to operational inefficiencies, particularly production and delivery disparities leading to negative gross margins.
Zoom Video (ZM)
Zoom Video (NASDAQ:ZM) provides video conferencing and collaboration software solutions. The company faces a notable challenge in its online average monthly churn rate. This increased to 3.2% in Q1 fiscal 2025 from 3.1% a year earlier. The churn rate reflects the percentage of online customers that stop using Zoom’s services each month, influenced by factors like tightening payment grace periods. The higher churn rate indicates that Zoom is losing a significant portion of its online customer base regularly. This poses risks to revenue stability and profitability. Replacing churned customers with new ones can incur substantial acquisition costs and strain cash flow management.
Moreover, in Zoom’s case, the increased churn issue becomes crucial for financial health and maintaining competitive positioning in the market. For instance, transitioning 26.8K enterprise customers with low annual recurring revenue (ARR) to online impacted the total number of enterprise customers, reducing them to 191K. Such transitions can affect the topline in the short term while the online churn rate increases. To conclude, Zoom is included on the stocks to sell list due to a high online average monthly churn rate.
Big Lots (BIG)
Big Lots (NYSE:BIG) is a discount retailer of furniture, home décor, and household essentials. The company had a considerable decline in net sales for Q1 2024. This is at $1.009 billion, with a 10.2% decrease against $1.124 billion in Q1 2023. This decline was primarily due to a sharp decrease in comparable sales (comp sales) of 9.9% YOY. This negative comp sales trend indicates that Big Lots struggles to attract customers and increase sales across its stores.
Additionally, despite efforts to enhance value perception and increase bargain penetration, overall revenue declined significantly. This highlights challenges in converting operational improvements into revenue growth. Despite efforts to control costs through initiatives like Project Springboard, Big Lots continues to face high operating expenses relative to its revenue base. The high selling, general, and administrative expenses contribute to the company’s adjusted net loss of $132.3 million for Q1, translating to an adjusted diluted loss per share of $4.51.
Overall, Big Lots is on the stocks to sell list because of the declining net and comparable sales, despite efforts to improve operational efficiency through initiatives like Project Springboard.
On the date of publication, Yiannis Zourmpanos did not hold (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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.