3 Stocks That Could Lose You a Lot of Money
It can be tempting to bet on an underdog. A stock that has already tumbled, dragged down by unrelenting pessimism, may reach a point where it doesn't seem it can possibly go any lower. But investors need to be careful. A bad company doesn't transform into a good company very often.
Avoiding big mistakes is a critical component of successful long-term investing. If you want to save yourself a lot of money, I'd suggest steering clear of Blue Apron (NYSE: APRN), Snap Inc. (NYSE: SNAP), and J.C. Penney (NYSE: JCP).
Blue Apron
Shares of meal-kit delivery service Blue Apron have lost two-thirds of their value since the company went public earlier this year. Blue Apron is hemorrhaging customers despite spending more than 16% of revenue on marketing in the latest quarter. Layoffs announced last month threw cold water on the growth story. And the CEO's recent comments disclosing trouble at the new fulfillment center in Linden, N.J., led to a new all-time low for the stock.
To any bargain-hunting investors who may be eyeing Blue Apron after its epic collapse -- stop. The company's business model, mailing overpriced groceries to its customers, doesn't make any sense. Blue Apron's prices, around $9 or $10 per serving depending on the plan, are almost comically expensive compared to buying ingredients for a comparable meal at a grocery store. For a family of four, a single Blue Apron meal would cost $36, and you'd still have to do most of the prep work yourself. There's simply no value proposition at all.
Blue Apron could potentially be an acquisition target. I could see a grocery store chain using the brand to jump-start its own meal-kit ambitions. But that's not enough of a reason to bet on the stock. If there is no acquisition, you're left with a poorly run company with a business model that doesn't work, burning cash at an unsustainable rate. Good luck with that!
Snap Inc.
Speaking of poorly run companies. Snap Inc., the social-media company behind the Snapchat app, recently reported its third-quarter results. Daily active users grew by just 3% over the previous quarter, and an inventory write-off related to its absurd Spectacles pushed the gross margin into negative territory.
Snap produced $208 million of revenue and a net loss of $443 million. Operating spending soared, with research and development expense up more than 300% year over year. The company admitted that the Snapchat app was too hard to use and announced that it would be redesigning it in an effort to appeal to a broader base of customers. This move will be disruptive, potentially making Snap's results in the near term even worse.
The biggest problem with Snap stock is the price. Even after a post-earnings tumble, Snap is still valued at around $15 billion. Revenue will be a bit less than $900 million this year, according to analyst estimates. With growth grinding to a halt, and with no indication that profitability is even a pipe dream for this company, a price-to-sales ratio of more than 16 is plain nuts.
Shares of Snap have already tumbled more than 50% since the IPO, but they could fall much further if the company's results continue to look like a train wreck.
J.C. Penney
In early 2012, shares of J.C. Penney briefly traded for over $40. Today, they're hovering around $2.50. Long story short, an effort to transform the retailer in 2012 failed miserably, leading to the sacking of the CEO after just 17 months and a brutal drop in sales. J.C. Penney has made some progress since then, but sales are still far below their peak.
J.C. Penney is trying to lower its dependence on apparel, which is probably the right move. The company began selling appliances last year, hoping to benefit from the slow-motion death of Sears Holdings. And it recently took the painful step of clearing out slow-moving merchandise in the women's department, knocking down the bottom line in an effort to better align its inventory with consumer demand.
J.C. Penney is not currently profitable, at least on a basis that's meaningful. It expects to produce an adjusted profit between $0.02 and $0.08 per share this year, but that includes a net gain on the sale of a distribution center. The actual retail business is in the red, and the only way to change that is by growing sales.
Is there any reason to believe J.C. Penney can succeed in doing that? The retail industry is in upheaval, roiled by overbuilding and e-commerce. Mall traffic seems to be endlessly slumping. And the department store, as a retail format, may not be long for this world. Betting on one of the worst performing companies in one of the worst parts of retail just doesn't seem like a good idea to me.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.