Three Stocks to Avoid for the Week of October 31st

Seeking out great stocks to buy is important, but many would say it’s even more essential to know which stocks to steer clear of.  A losing stock can eat away at your precious long-term returns.  So, figuring out which stocks to trim or get rid of is essential for proper portfolio maintenance.  

Even the best gardens need pruning and our team has spotted a few stocks that seem like prime candidates for selling or avoiding.  Continue reading to find out which three stocks our team is staying away from this week. 

Rising interest rates and a cooling off of the red-hot housing market creates a challenging backdrop for mortgage provider Rocket Companies (RKT). The average rate on a 30-year fixed-rate mortgage surged to nearly 7% last week, its highest level in over 20 years, according to Freddie Mac.  Mortgage rates have more than doubled since the start of the year, when the average 30-year mortgage stood at 3.11%.  Furthermore, the Mortgage Bankers Association recently reported that mortgage application volume is down 37% year-over-year.  This situation won’t likely resolve anytime soon as the Federal Reserve  isn’t signaling a near-term letup in monetary policy tightening.

Rocket has struggled to meet expectations for the past few quarters as it laps 2021’s blockbuster numbers.  Most recently the company came out with quarterly adjusted earnings of -$0.03 per share, missing the consensus estimate of $0.02 per share.  This compares to earnings of $0.46 per share a year ago.  Revenue was reported as $1.44B, down nearly 48% from the same period last year and 26% lower than the consensus estimate.  

Rocket’s been underperforming the broader market so far in 2022. RKT shares have lost about 55% since the beginning of the year versus the S&P 500’s decline of 20%.  The pros on Wall Street say to Hold RKT.  Of 16 analysts offering recommendations, 2 rate the stock a Buy, 12 rate it a Hold and 2 say to Sell RKT shares.  

While the future remains bright for renewable energy, not all solar stocks are a buy. Provider of solar engineering and construction services, iSun Inc. (ISUN), has seen operating losses skyrocket alongside revenue increases in recent years.  

iSun reported second quarter 2022 revenue of $16.5 million representing a $12.1 million or 278% increase over the same period in 2021.  Alongside top line growth over the past year, the company has reported $15.3 million in operating losses.  Operating income in the second quarter was a loss of $5.6 million compared to a loss of $2.8 million over the same period in 2021. YTD operating income was a loss of $11.3 million compared to a loss of $5.4 million during the same period in 2021.

Given the company’s already high debt position after a series of acquisitions in 2021, the additional losses could force the company to raise equity inorder to de-lever its balance sheet which could mean further declines for iSun.  The small, unprofitable solar company’s stock is down 72% over the past 12 months, but it’s far from a bargain considering the risk factor.  

Fintech company Upstart Holdings (UPST) share price is down more than 93% from its October ATH and it may have more to go as bank partners tighten their fists.  Institutional lenders are less willing to fund Upstart’s loans than ever and it makes sense for backers to be so cautious in the current macroeconomic environment.  Rising interest rates will continue to add pressure to consumers leading to more defaults.  Upstart is especially vulnerable as its AI models have yet to be tested during a significant down period in the credit cycle.  

In Upstart’s Q2 report, management cited another reason for the lower outlook. The company more than doubled the amount in loans it funded with its own cash in just a single quarter.  At the end of Q1, the company held $600 million in loans on its own balance sheet, up from $250 million in the previous quarter, severely exposing its balance sheet to credit risk at what could be the worst possible time.  

In the second quarter the company saw adjusted earnings of $0.01 per share from revenue of $228 million, missing the consensus expectation of $0.10 per share by 90%.  “This quarter’s results are disappointing and reflect a difficult macroeconomic environment that led to funding constraints in our marketplace. In response we’re taking the necessary actions to build a more resilient and committed funding model over time,” said Dave Girouard, co-founder and CEO of Upstart.  Until sustainable momentum is realized, we’re sticking to the sidelines.