Investors face a complicated picture heading into the holiday season. War, inflation, high interest rates, and a potential recession are among the risk factors on the horizon.
Many investors are understandably turning to fixed income and defensive stocks to ride out the current storm. By contrast, this is precisely the wrong time to be taking more speculative bets. These seven vulnerable and risky stocks would be tough to own even in the best of times, and they’re downright toxic for your portfolio in current economic conditions.
Moderna (MRNA)
Moderna (NASDAQ:MRNA) stock was one of the biggest winners in the market in 2020. It’s not hard to see why. The company’s COVID-19 vaccine was one of the first to come to market and generated absolutely mind-boggling amounts of revenue.
MRNA stock soared from around $20 pre-pandemic to as high as $400 when it was seemingly on top of the world. However, like many firms that come up with a single blockbuster product, Moderna has struggled to come up with a follow-up act.
And let’s face it. Heading into 2024, demand for COVID-19 vaccines has largely gone away. We’ve seen numerous reports this year of countries simply throwing out unused vaccine doses given the lack of additional demand. Needless to say, Moderna’s revenues are now plummeting.
Unfortunately, it seems Moderna scaled up its operations too heavily during the pandemic without developing other vaccines that could shoulder the load once COVID-19 vaccine demand dropped off. Analysts project that Moderna will lose a stunning $12.73 per share this year. With revenues plunging, no other blockbuster vaccines in the works, and the company running gigantic losses, it’s time to cut ties with Moderna.
Royal Caribbean (RCL)
Royal Caribbean (NYSE:RCL) is one of the world’s leading cruise lines. The firm’s ever-more-luxurious ships offer a one-of-a-kind party and leisure experience at sea.
Unfortunately, the pandemic greatly disrupted Royal Caribbean’s business model. With cruises put on pause during the early days of the virus, Royal Caribbean had to take on tons of debt and issue mountains of new shares to survive the downturn.
Cruise operators aren’t well-positioned to withstand industry downturns because the assets — the ships themselves — are hugely expensive and wear out quickly. Any loss of revenues can have a magnified impact on the firm’s overall finances.
This circles back to the outlook heading into 2024. Consumer spending appears to be waning amid a softening economy and higher interest rates. And Royal Caribbean itself suffers from rising interest rates, given its $18 billion in long-term debt and more than $28 billion in total liabilities. This makes RCL stock an awfully dangerous one to hold going into a recession.
Digital Realty Trust (DLR)
Digital Realty Trust (NYSE:DLR) is a real estate investment trust (REIT) focused on data centers.
Investors have gravitated to the sector. As the adage goes, data is the new oil. So, owning the data centers could offer similar returns to owning energy logistics in decades past.
However, that analogy falls apart to a degree on closer inspection. At its core, Digital Realty provides third-party services for companies that want to host their servers and computing needs off-site. The issue here is that large tech companies have increasingly built their own corporate-run data centers rather than outsourcing it to a third party.
Digital Realty has turned to acquisitions to keep its growth streak going as its organic results started to lose steam. But now, rising interest rates are making it much more expensive for Digital Realty to service its existing debt let alone engage in more M&A.
Research shop Hedgeye named DLR stock one of its top bearish REIT positions earlier this year. They believe the company will have to cut its dividend given the interest rate environment. DLR stock is up about 25% year-to-date (YTD). That seems excessive given how badly the REIT sector as a whole has fared in 2023 and the specific risks facing data center landlords.
Snap (SNAP)
Youth-focused social media platform Snap (NYSE:SNAP) has had a bumpy time in recent years.
The company has developed a relatively small but loyal user base. Investors have long hoped that Snap could break through and become a true mass market application. However, with rivals frequently copying many of Snap’s best features, Snap has struggled to ever take the next step. And TikTok has overshadowed Snap within the company’s core demographic.
As has often been the case, Snap disappointed investors once again with its latest earnings report. While the headline figures were reasonably strong, the company offered soft ad guidance due to factors such as the geopolitical tensions in the Middle East.
Snap has been publicly traded since 2017. It still is barely profitable, and revenues are barely growing, either. Investors should stop giving this company any more chances unless something fundamental changes.
DraftKings (DKNG)
Sports gambling platform DraftKings (NASDAQ:DKNG) has had a volatile run since becoming a publicly traded company.
DKNG stock was a popular SPAC, with shares rising sevenfold from their original offering price. But that winning streak didn’t last long; by last fall, DraftKings had fallen back to nearly its original $10 offering price. Now though, DKNG stock has tripled once again, with traders thinking that the company’s luck has returned.
It’s true that top-line revenue growth is impressive, at 57% year-over-year (YOY). This is a function of both the market starting to consolidate, and additional states legalizing sports betting.
However, the company continues to run massive operating losses. This past quarter, DraftKings lost a stunning $283 million on revenues of just $790 million. Put simply, DraftKings is still generating outsized losses on its gambling ventures. In this business, the house is supposed to win, rather than bleed out cash. Until that changes, DKNG stock is an avoid.
Paramount Global (PARA)
Paramount Global (NASDAQ:PARA) is a television company. It operates channels such as CBS along with a streaming service while licensing its vast content library out to generate revenues through various distribution channels.
PARA stock has been a popular pick with value investors for years now. On paper, the company has looked like a cheap stock with a low P/E ratio and a valuable asset base.
Unfortunately, the streaming economy has been a tricky one to navigate. Leaders like Netflix (NASDAQ:NFLX) have created an endless stream of new movies and TV shows. This has driven up production costs and forced smaller players like Paramount to spend more to compete. And the flood of streaming services has overwhelmed consumers and driven subscription fatigue.
Paramount still has some valuable assets, such as live sporting rights. But it appears to be a declining business that will struggle to survive in the shadow of larger players like Netflix. Resist the temptation to get caught in the Paramount stock value trap.
Duolingo (DUOL)
Duolingo (NASDAQ:DUOL) shares are up an amazing 120% year-to-date. It’s a huge move for the language-learning app company.
There’s no doubt that Duolingo has brought a fresh and innovative approach to the language-learning arena. I know many people who have had favorable experiences with the language-learning application. However, a good app doesn’t necessarily make a good business. Analysts are projecting roughly $515 million in revenues this year, which would put DUOL stock at around 13 times forward revenues.
This seems like an unsustainable price. Duolingo has struggled with profitability, and is still working to fully monetize its flagship application. Things such as English testing certifications are interesting and could work over time, but the company will need to do more to demonstrate success.
On the date of publication, Ian Bezek did not have (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.
