Investing in growth stocks is not for the faint of heart. That’s particularly true when it comes to acquiring the shares of companies trying to develop a brand new product or service or investing in the names trying to make big comebacks. In fact, as regular readers of my columns might surmise, I’ve lost significant amounts of money more than once by betting on growth stocks whose plans went awry. Among the names that have undermined my portfolio in recent years are electric-vehicle makers Ayro (NASDAQ:AYRO) and Electremechannica (NASDAQ:SOLO) and biotech firms Bionano (NASDAQ:BNGO) and Novavax (NASDAQ:NVAX). (I’m still holding onto the shares of the latter two companies, however, because I believe they have what it takes to succeed).
On the other hand, in the last few years, my record in picking growth stocks to sell has been nearly flawless. From horrible covid plays like Ocugen (NASDAQ:OCGN), Peloton (NASDAQ:PTON), and Co-Diagnostics (NASDAQ:CODX) to the worst Cathie Wood picks, including Teladoc (NYSE:TDOC) and Virgin Galactic (NYSE:SPCE) to doomed growth stocks like Mullen (NASDAQ:MULN) and Bed, Bath, and Beyond (OTCMKTS:BBBYQ), I’ve picked out many true duds and made few very mistakes when it comes to identifying growth stocks to avoid.
So reading this column might be worthwhile for you, and you may want to share it with any friends or family who have bought the shares of any of these stocks to sell or may be considering doing so.
Growth Stocks to Sell: Cava (CAVA)
In a column published on June 21, I outlined my bear case on Mediterranean restaurant chain Cava (NYSE:CAVA), citing its stratospheric valuation, its red bottom line in 2022, its rising costs, and the huge amount of competition that it faces. Nonetheless, from June 21 to the afternoon of July 10, CAVA stock jumped 20%.
Moreover, on July 10, several investment banks released positive notes on CAVA. JPMorgan, for example, cited Cava’s “well-designed operating platform and broadly appealing consumer offering,” along with its ability to open many new restaurants. Similarly, Jefferies cited the company’s ability to open many new restaurants.
Still, the company’s valuation has gotten even more stratospheric, of course, after its recent rally, with the shares now changing hands at a trailing price-sales ratio of 6.8. And none of the bullish statements I’ve seen about the company address that valuation or its significant losses, which are only expected to climb going forward, and its very steep competition. Therefore, I continue to view Cava as one of the growth stocks sell that are destined for disaster.
Uber Technologies (UBER)
As I noted in a recent column, there are multiple signs that the post-pandemic trend of huge spending on vacations and tourism is slowing. “For example, Citi cut its price target on American Express (NYSE:AXP) last month to $148 from $150, citing card data which indicated that “travel and entertainment spend” is indeed decelerating.”
A slowdown of spending on tourism will likely be ruinous for Uber (NYSE:UBER), whose shares are currently trading at very high levels. Specifically, the stock has a huge forward price-earnings ratio of 99 times and a gigantic price-book ratio of 11.6 times. That’s just one reason why this is one of the top growth stocks to sell.
Also noteworthy is my own recent experience with Uber. When embarking on flights this year, I developed a habit of parking at a train station about a 20-minute drive from the Dallas-Fort Worth Airport and taking the train to the airport (I should explain that I’m not a great driver and find driving in airports to be very stressful), Often, I return to the airport relatively late at night and take Uber to the train station. Lately, the prices for those 20-minute rides have gone through the roof. On a recent Sunday night, for example, I was forced to pay $85, including the tip, and that was with a $10 discount from my credit card. Of course, I’m going to look for a different method of getting home on my next trip.
Given my experience, along with a time in May when I paid Uber $60 for a 20-minute trip in Las Vegas, I believe that Uber is padding its financial results by charging a fairly exorbitant amount for rides. While that may work for a month or two more, while “revenge travel” is still alive and well, I have a feeling that the company is not going to get away with charging such high fares for much longer, given indications that Americans are getting over their “travel bug.”
Frontier Group Holdings (ULCC)
Frontier Group Holdings (NASDAQ:ULCC), which owns Frontier Airlines, has three main problems: indications of slowing demand for flights in general, poor ratings by its customers, and a rather high valuation.
As I noted in a previous column, “the US. Travel Association reported on June 29 that ‘Air travel demand appears to have stabilized somewhat.’”
On the ratings front, Frontier has received an abysmal two stars out of five from consumers on TripAdvisor. After my recent experience with Frontier, I can see what that is. In February, I bought a ticket to fly from Baltimore to Dallas, with the takeoff scheduled at 1:46 PM on July 9. In May, I was informed that the flight had been delayed until 7:45 PM. A few hours before I was supposed to take off, I was told that the flight had been delayed until 9:30 PM. The airlines blamed that delay on the weather, even though no other flights seemed to have been meaningfully delayed in Baltimore.
Then, for some reason, the truck that was supposed to fuel the airplane ran out of fuel, causing another 45-minute delay. We wound up taking off around 10:15 PM, 8.5 hours after the original takeoff time, and of course, we didn’t arrive in Dallas until after midnight. Frontier did not offer the passengers any compensation for all of these issues.
ULCC stock has an elevated trailing price-earnings ratio of 31.76 times.
Growth Stocks to Sell: Teladoc (TDOC)
Teladoc faces tough competition, with Amazon (NASDAQ:AMZN) becoming one of its top foes recently. TDOC is still generating large losses while its debt load is becoming sizeable. Given all of these points, TDOC should definitely be viewed as one of the growth stocks to sell.
Amazon’s One Medical earlier this year began offering unlimited telemedicine appointments for just $144 per year. As more consumers become aware of the offer, Teladoc is likely to lose a large share of its customer base. Moreover, Amazon’s deal shows that telemedicine, to a large extent, has become commoditized. In other words, there’s nothing special or unique about Teladoc’s offering, and many other firms can easily and quickly provide similar services.
Analysts, on average, expect TDOC’s loss per share to come in at $1.05, and the company’s net debt as of the end of the first quarter had climbed to over $700 million.
Schlumberger (SLB)
Schlumberger (NYSE:SLB) specializes in selling equipment used in oil exploration. Oil prices have declined nearly 20% since mid-January, and that situation is likely to put major, downward pressure on SLB’s top and bottom lines.
Not only that, but SLB historically obtains nearly 24% of its revenue from Europe, which is currently in a recession. Also worth noting is that 27.6% of new autos sold in the EU in the fourth quarter of last year were EVs, while the same ratio came in at 18.4% last quarter. Taken together, lower oil prices, the recession, and reduced sales of gas-powered autos are going to weigh on Sclumberger’s European customers, putting significant, downward pressure on SLB’s own financial results. Additionally, low oil prices and rising sales of EVs are likely to weigh
SLB’s trailing price-earnings ratio of 20 times is way too high, given all of the potent threats that it’s facing.
Growth Stocks to Sell: Wipro (WIT)
India-based Wipro (NYSE:WIT) supplies IT professionals to major companies. Even before firms started plowing huge amounts of money into artificial intelligence this year, companies like ServiceNow (NYSE:NOW) had been automating many IT services, eliminating the need for many of WI’s IT professionals.
But now, according to multiple sources I’ve seen, AI is making programming quite easy. As one Substack writer recently put it, “AI gives everyone the ability to program, by describing what they want the computer to do in English, and the computer figuring out how to do it..”
Since that’s the case, many companies are no longer going to need Wipro’s services.
Agreeing with me on this point in April was Seeking Alpha columnist JP Research, who wrote, “The AI threat [to Wipro] is real, entailing margin pressure near term and potentially long term as well.”
Disney (DIS)
Add declining theme park attendance to Disney’s (NYSE:DIS) many woes. The Washington Examiner on July 10 reported that “The Disney theme parks’ wait times are significantly less, indicating that attendance is down, according to new travel analysis reports.”
Specifically, research firm Touring Plains found that the average time that Disney’s customers waited for attractions on July 4 was 27 minutes, way below the average waits of 31 minutes and 47 minutes in 2022 and 2019, respectively.
Meanwhile, in 2023, “four of [Disney’s] biggest [movie] releases…have struggled in theaters,” the company continues to be meaningfully hurt by the ongoing cord-cutting phenomenon, and its streaming channels are still losing money.
Despite all of these big problems, Disney’s trailing price-earnings ratio is a hefty 39. Also worth noting is that DIS had a rather large net debt of $38 billion as of the end of Q1.
On the date of publication, Larry Ramer was long BNGO and NVAX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
