With last week’s dismal jobs report in the back mirror, the S&P 500 is currently off its all-time highs. And, there’s fear in the air that the U.S. economy might be in worse shape than anticipated- even as the Federal Reserve is now expected to begin a rate reduction of 0.50%. The result? A sell-off.
When investing in growth stocks, it’s more important than ever to focus on the fundamentals of the top and bottom lines.
“Growth stocks are those companies expected to grow sales and earnings at a faster rate than the market average,” according to Investopedia. As a result, if (and when) the rug is pulled, companies with poor financials will plummet the fastest. Looking out for growth stocks to sell might be a prudent choice before that happens.
To get my list of stocks for this article, I screened the market using the following criteria.
- Earnings growth rate: Negative growth in the latest full-year financials and its latest quarterly report
- Revenue growth rate: Negative growth in the latest full-year financials and its latest quarterly report
- Analyst rating: Buy or hold
- Trading price: Above $10
Then, I arranged the stocks based on their highest earnings percentage drop, arriving at the top three. The results are somewhat subjective since I scanned for buy- and hold-rated stocks instead of those that are sell-rated. However, a linear decline across yearly and quarterly reports indicates that you might need to sell these growth stocks before the bottom falls out.
Silicom Ltd. (SILC)
Known as a leading provider of high-performance networking and data infrastructure solutions, Silicom Ltd. (NASDAQ:SILC) provides OEMs with solutions for their server and cloud-based systems. Silicom Ltd.’s products range from server network interface cards to programmable cards and other stand-alone products. The company operates the sectors of Data storage and big data, Network appliances, Cloud and virtualized data centers, Servers and IoT.
The year of 2023 was a challenge for Silicom Ltd. Revenue slid from $150.6 million to $124.1 million. Also, the bottom line turned red, at -44 cents per share, compared to last year’s $2.73 profit – a 116% drop. This prompted the company to announce a five-year strategic plan to reduce expenses and build up its core business.
However, its Q2 of fiscal year 2024 results show no signs of recovery, with revenue further sliding from $38.1 million last year to $14.5 million. Meanwhile, the quarter ended with a 25 cent loss, compared to a 56 cent profit in the same quarter last year. Silicom Ltd. attributes the worsening performance to excess customer inventory, longer sales cycles and a slowdown in global demand.
SILC stock is already down 34% year-to-date (YTD) and has a hold rating. Given Silicom Ltd.’s dismal financials, I’d make it a contender for any growth stocks to sell list.
Stepan Company (SCL)
Stepan Company (NYSE:SCL) is a leading chemical producer specializing in intermediate and specialty chemicals used in various products, such as detergents, disinfectants, emulsifiers and more.
SCL operates in three main segments. The first is Polymers, providing its clients with polyester resins and other polymer-related products. The second is Surfactants, which produces cleaning-related chemicals used in detergents, fabric softeners and more. The third is Specialty Products, which includes emulsifiers, flavorings and solubilizers for pharmaceutical and food applications.
Like the other two growth stocks to sell on this list, SCL’s financial performance has declined, highlighting some red flags for the current financial year and beyond.
In 2023, for example, net sales decreased by 16% year-over-year (YOY), while operating income fell by a massive 72%. Even worse, net income decreased by 73%.
“The Company had a challenging 2023 due to a slow down in demand across most end use markets and significant customer and channel inventory destocking,” said president and Chief Executive Officer Scott Behrens. “While we believe the negative impacts of destocking are mostly behind us, we continue to experience significant destocking within our agricultural business and expect this to continue through the first half of 2024.”
True to his word, Q2 FY24’s results were lackluster, with net sales and net income dropping by 10% and 19% YOY, respectively. SCL’s top and bottom lines have been battered by rising corporate expenses, lower selling prices and competitive pressure in Latin America.
Executives are cautiously optimistic about their outlook, and analysts rate SCL stock a buy. But the company’s declining metrics might be enough to add it to your sell list.
Schneider National (SNDR)
Schneider National (NYSE:SNDR) is a freight and logistics company that operates in three main segments. Truckload provides freight services under long-term contracts that run on consistent routes. Intermodal offers drayage and rail intermodal services to its customers. Finally, Logistics provides transportation systems analysis and additional sources of truck capacity to customers.
Schneider National’s FY23 results do not bode well for the company’s immediate future. Operating revenues were down 17% YOY, while income from operations fell sharply by 51%. Even worse, the company’s bottom line fell 48% on GAAP and non-GAAP bases.
More recently, its Q2 FY24 results are no better (or even worse in some areas). While operating revenue decreased by a mere 5%, increased spending and reduced operating income resulted in a massive 69% contraction in net income.
While Wall Street analysts rate SNDR stock as a consensus buy, its shaky fundamentals and deteriorating financials suggest placing it on my growth stocks to sell list.
On the date of publication, Rick Orford 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
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
