Buyer Beware: Avoid These Discounted Stocks for Now
When it comes to investing in the stock market, timing isn’t everything. However, buying a stock at a discount can certainly give you more bang for your buck. But, beware – not all discounted stocks are worth buying. Sometimes, a stock’s setback is a warning sign of more trouble ahead.
The S&P 500’s Biggest Losers
Last month, four S&P 500 stocks took a significant hit, losing around 30% of their value in just two days. These stocks were Super Micro Computer, Qorvo, Huntington Ingalls Industries, and Estée Lauder. But, what’s the common thread among these companies? Their recent earnings reports and guidance for the current quarter.
Qorvo’s Struggles
Qorvo, a semiconductor company, beat its top- and bottom-line estimates for the quarter ending in September. However, its revenue guidance fell short of analysts’ expectations due to stiff competition and weak smartphone demand.
Estée Lauder’s Challenges
Estée Lauder’s fiscal first-quarter results were in line with expectations, but down from year-ago comparisons. The company’s decision to cut its dividend and withdraw guidance for the full year due to uncertainty regarding its business in China was the main culprit behind its steep sell-off.
Huntington Ingalls’ Woes
Huntington Ingalls’ quarterly earnings fell short of estimates, and the shipbuilder was forced to lower its five-year cash-flow outlook due to new doubts about a contract with the U.S. Navy and supply chain challenges.
Super Micro Computer’s Accounting Concerns
Super Micro Computer’s accounting firm, Ernst & Young, resigned as its auditor, citing concerns about the company’s accounting practices and internal controls. This has raised questions about the company’s reported stellar results.
A Deeper Look
While each company has its unique problems, they all share one common trait – their struggles are largely temporary and cyclical in nature. However, the market’s swift and decisive reaction to these earnings reports suggests that investors are becoming increasingly bearish.
A Warning Sign
The steep sell-offs of these four stocks are not just knee-jerk reactions to disappointing quarterly reports. They’re a sign of a broader concern about future earnings and the overall market’s valuation. With the S&P 500’s trailing-12-month price-to-earnings ratio of 25 and its forward-looking ratio of 24 above long-term bull market norms, investors may be looking for ways to adjust these numbers.
A Risky Proposition
Buying these beaten-down stocks right now may be a dangerous proposition. Investors could continue to drive them lower before they reach their ultimate lows. These companies are struggling for reasons beyond their control, making them vulnerable to further declines.
A Wait-and-See Approach
While these companies will eventually fare better, it’s best to take a step back and wait for the market to stabilize. In the meantime, it’s essential to read the room and understand the broader market dynamics at play.
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