Not every stock is a winner, and it’s important to know when to cut your losses. While it’s normal for corporations to report bad earnings every once in a while, some earnings reports can shatter growth narratives and put investors in tough spots.
Furthermore, some stocks can rally substantially for 1 to 2 years before coming back down to earth. These growth stocks are particularly risky as some investors may hold their shares, hoping the corporations can reclaim their all-time highs. Investors should remember they can choose from thousands of companies. You can find many growth stocks that don’t have red flags and have plenty of growth opportunities. With that in mind, why would you stick with a company that looks like it will underperform the stock market?
These are some of the stocks to sell before the market drops. Even if the market rallies, these stocks will likely be left behind.
Zoom (ZM)
Zoom (NASDAQ:ZM) enjoyed its heyday during the pandemic as people were forced to stay in their homes. The stock quickly soared as more people used the video conferencing app to meet friends, attend class and arrive for business meetings.
A return to normal times hasn’t done much for Zoom. Shares are down 20% year-to-date and are roughly 90% down from their all-time high. Zoom trades at a 21 P/E ratio, but that shouldn’t fool investors. Growth is stagnant at the company, as revenue only inched up 3.2% year-over-year (YOY) in the first quarter of fiscal 2025.
Zoom’s profits soared YOY, but it’s a bit discouraging when profits come amid cost-cutting without revenue growth. Profit margin expansion possibilities are very limited when a company is only maintaining a single-digit revenue growth rate. Most Wall Street analysts are on the sidelines for this stock. It’s rated as a Hold with five Buy ratings and one Sell rating. The remaining 15 analysts rated the stock as a Hold.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) is facing several headwinds. The company is losing ground in China as other EV manufacturers gobble up market share. China is an important market for Tesla’s long-term growth story, and it appears to be shaky. Chinese EV manufacturers are producing high-quality vehicles at much lower prices than what you’d find in the United States.
Chinese EV makers aren’t showing up in the United States or the European Union solely because of high tariffs. That doesn’t bode well for Tesla and other EV makers when they try to tap into markets that aren’t affected by those elevated tariffs. However, the problem is worse for Tesla stock since it trades at a 47 P/E ratio.
Tesla’s revenue dropped by 13% YOY in the first quarter of 2024. Most of its revenue comes from automobiles, which doesn’t warrant a tech company’s valuation. Even its net profit margins look like an automobile company.
Etsy (ETSY)
Etsy (NASDAQ:ETSY) is another stock that performed well during the pandemic and has been well removed from its all-time highs. Shares have crashed roughly 80% from all-time highs and are down 27% year-to-date. Declining gross merchandise sales (GMS) are the main culprit for the lack of enthusiasm around the stock. If this metric continues to decline, revenue and earnings will go along with it.
Investors saw that on full display in the first quarter of 2024. During that quarter, consolidated GMS dropped by 3.7% YOY. A lower GMS figure also impacted revenue and net income. Revenue was only up by 0.8% YOY, as higher fees and advertising helped to keep this figure flat. The company wasn’t as lucky with its profits, as net income dropped 15% YOY.
Etsy isn’t the same place as it was a few years ago. It’s more difficult to find handmade goods that don’t resemble products you could buy from Amazon (NASDAQ:AMZN). Furthermore, the company’s heightened fees have frustrated sellers. Etsy’s management got greedy with its fees during the pandemic in hopes of boosting shareholder returns. Now, investors are jumping off the ship before things get worse.
On the date of publication, Marc Guberti did not hold (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.