The stock market hasn’t had a good start to the second quarter. Major indices like the S&P 500 and the Nasdaq 100 seem determined to give up their year-to-date gains. Macroeconomic concerns are heating up as interest rates will likely stay higher for longer. Inflation is also back and came in hotter than expected in March.
Investors have to stay firm with their high-conviction picks. Selling and avoiding the market until a recovery takes shape is a bad move. Most investors can benefit from buying and holding solid companies. However, these three stocks aren’t looking solid. You may benefit from selling these stocks soon.
Supermicro (SMCI)
Supermicro (NASDAQ:SMCI) has become the new face of the AI rally. The stock attracted Wall Street analysts and retail investors alike with a momentum rally of the ages. At its peak, the stock was up by more than 5,000% over the past five years. However, the stock has several long-term risks that have begun to materialize.
Investors got put on edge after Supermicro did not give preliminary results. It’s a big red flag as the company has given preliminary results for several quarters. An excellent preliminary report earlier in the year prompted investors to accumulate shares in a level of hype that resembles the EV boom in 2020 and 2021.
It’s very concerning that the company opted against hinting at what earnings will look like. Valuation has been a concern since the stock’s dramatic run-up to start the year. It’s currently trading at a 56 P/E ratio, which seems far too high. Net profit margins also don’t have the opportunity to expand meaningfully. If revenue growth decelerates, the stock can be due for a massive drop from current levels.
Tesla (TSLA)
Tesla’s stock (NASDAQ:TSLA) lost many fans this year. Analysts on Wall Street are split on this stock and currently rate the stock as a “Hold.” The stock is down by more than 40% year-to-date and traded in late 2020.
Rising inflation and elevated interest rates will hurt EV manufacturers. Americans are holding onto their cars longer and looking at used vehicles when buying new cars. Manufacturing companies like Tesla need good turnover among U.S. consumers to generate more sales. The current economic climate is making people more cautious.
Tesla also suffers from a higher valuation than most automakers. The stock has a 34 P/E ratio, which is too high for a company primarily selling cars. There’s a small tech component, but automobile sales still make up more than 85% of total sales. The company is selling fewer vehicles and is losing market share in China. The long-term outlook doesn’t look good for now.
Netflix (NFLX)
Netflix (NASDAQ:NFLX) has enjoyed a resurgence. Shares are up by 71% over the past year and have gained 18% year-to-date. Those results include the aftermath of an earnings report that rubbed investors the wrong way.
The earnings report looks good on the surface. Revenue increased by 15% year-over-year, and the company expects to grow by 13%-15% in fiscal 2024. However, the company also announced that it wouldn’t report subscriber growth moving forward. Investors didn’t like that decision. If the company believed subscriber growth would remain robust in future quarters, Netflix wouldn’t be hiding it. Investors should remember that it was only two years ago when Netflix saw significant growth deceleration. Netflix only grew its subscriber base by 4.0% in Q4 2022. The company even reported a net loss of global subscribers in Q1 2022 and Q2 2022.
The company’s password-sharing crackdown heavily contributed to growth rates in 2023 and carried over into Q1 2024. The policy took effect in May 2023 and made results from previous quarters easy benchmarks to beat. Netflix has steeper comps and a lofty 46 P/E ratio. Revenue growth will likely decelerate in the second half of 2024 and continue into 2025.
On the date of publication, Marc Guberti 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.