The U.S. equity valuations continue their remarkable trend upward, well beyond anyone’s expectations in 2023. The major indices appreciated amid expectations of a soft landing for the economy as the Federal Reserve battles inflation. While inflation still sits above the Federal Reserve’s target, it is well below where it was 12 months ago. However, despite a so-called “soft landing,” there are still many businesses negatively impacted by the current macroeconomic situation. Businesses selling to consumer end-markets are the most exposed to economic tumult as consumers begin to pull back spending. At the same time, these stocks to avoid in August are being punished by the market due to not delivering stellar results.
Today, we will investigate three companies equity investors should consider selling as renewed macroeconomic volatility sends certain stocks plummeting.
Digital Turbine (APPS)
Digital Turbine (NASDAQ:APPS) is a software company that provides both mobile app delivery and advertising solutions. Operating primarily through two main business segments, “On-Device Solutions” and “App Growth Platform,” the company was able to carve out a niche area within the broader ad-tech space. If you live in the United States and decide to buy an Android smartphone from a wireless carrier or directly from a smartphone original equipment manufacturer (OEM), like Samsung, more likely than not, that particular device will boot up with some apps already pre-installed by the carrier or OEM. This is Digital Turbine’s On-Device Solutions business segment at work. The ad-tech company forms partnerships with both wireless carriers and OEMs to deliver mobile apps to end-users. Digital Turbine’s second business enables app developers as well as advertising brands and agencies to create targeted ad campaigns.
Unfortunately for Digital Turbine, lackluster growth in a very competitive space along with a slew of acquisitions that have yet to prove their worth has battered the company’s shares over the past year and a half. In their Q4’2023 earnings call, the ad-tech company reported year-over-year revenue contraction and was not optimistic about the overall macroeconomic environment. In a recent Q1’2o24 earnings call, though the company beat revenue and EPS estimates, the company has yet to improve profitability metrics and was still focusing on improving integration with AdColony.
APPS’s shares are down more than 33% year-to-date, and without any meaningful improvements in profitability, current shareholders are perhaps better off cutting their losses as soon as possible.
Toast (TOST)
With operations in both the United States, Ireland and India, Toast (NYSE:TOST) is a cloud-based restaurant technology firm that provides point-of-sale, payment processing and various other performance-enhancing software solutions to restaurants. The company’s primary product, the Toast POS, allows both point-of-sale functionality and payment processing in one solution. Customers dining in a restaurant employing Toast’s software products will also be able to leverage Toast Order and Pay, which gives them the ability to browse the restaurant’s menu, order food, and pay the bill just by scanning a QR code. Additionally, Toast has an online ordering system for customers desiring take-out.
The company operates in a very competitive space with well-established firms such as Block and Shift4, and this has caused the company to make some controversial decisions. Last month, for example, Toast reported it would get rid of its $0.99 order fee to remain competitive with its peers, and investors dumped TOST shares shortly afterward afraid of the company’s dimming profitability prospects. With the recent report that Toast has reached adjusted EBITDA profitability, investors still should not become too excited. Whatever effect this news might have on the company’s shares, shareholders ought to remain cautious as the effect of ending its order fee has yet to materialize in its profitability metrics and a significant amount of share-based compensation is being added back in their EBITDA calculation, which is controversial in its own right.
Sealed Air Corporation (SEE)
Founded in 1960, Sealed Air Corporation (NYSE:SEE) is a global designer and provider of packaging solutions that preserve food, protect goods and automate packaging processes. SEE operates two primary business segments: “Food Packaging Solutions” and “Protective Packaging Solutions.” The former offers automated and integrated packaging solutions to food processors, while the latter offers solutions to protect goods during transit. The company has a sizeable portfolio of packaging solutions such as CRYOVAC food packaging, Sealed Air brand protective packaging and Bubble Wrap brand packaging.
The global nature of SEE’s business, which spans 114 countries/territories could be seen as a competitive advantage, but in the current macroeconomic environment where input prices, such as raw materials, have become pricier, this can lead to earnings volatility. Sealed Air has missed sales estimates for four consecutive quarters, and this has been due to a variety of factors, including inflationary pressures, high interest rates and “customer destocking.” Destocking implies SEE’s enterprise customers are not refilling inventories as quickly as they used to because they were expecting less demand from consumers.
SEE’s shares have fallen more than 20% since the start of the calendar year. With the company expected to report sluggish annual revenue and EPS growth this year, investors still holding onto the stock should reconsider.
On the date of publication, Tyrik Torres 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.
