The old saying “what goes down must come back up again” has numerous counterpoints if applied to the stock market. Many believe that mean-reversion is inevitable. However, that is simply not the case, as asymmetrical downside is a frequent occurrence in the financial markets.
Considering the above, we as investors must be diligent in our research process to avoid falling knife stocks. Alternatively, we could look for falling knife stocks to short.
Presented here are three falling knife stocks to avoid or short in 2024. Each of these stocks is confronted with significant headwinds and lacks the necessary quantitative stealth to recover. Furthermore, a comprehensive market-based analysis was conducted, taking into account technical pricing points.
British American Tobacco (BTI)
British American Tobacco (NYSE:BTI) has fundamental concerns, echoed by its stock price slump of approximately 15% year over year.
Although BTI stock is priced at a forward price-to-earnings ratio of merely 6.28x, additional downside seems likely. The company’s pivot out of combustible products into new products such as vapes, and tobacco-free nicotine pouches could very easily go wrong because they’re consumer trends that have yet to consolidate. Moreover, British American Tobacco’s five-year compound annual growth rate (CAGR) of 2.18% shows that its baseline organic growth is sluggish, thus adding fuel to the fire.
Furthermore, British American Tobacco is feeling the heat from Wall Street analysts. Oppenheimer (NYSE:OPY) recently assigned a Sell Rating to its stock via a pairs trading research report. Sure, I concede that Wall Street analysts are wrong from time to time, but I can’t help but agree with Oppenheimer in this case.
Upstart Holdings (UPST)
For those unaware, Upstart Holdings (NASDAQ:UPST) facilitates loans with a comprehensive AI screening model that assigns credit scores via peripheral variables such as an applicant’s alma mater and job prospects.
Despite its novel business model, Upstart faces significant fundamental headwinds. The U.S.-based loan intermediary is combating subdued loan volumes. Upstart’s fourth-quarter report revealed $1.3 billion in originations, a 19% year-over-year decrease. I cannot see these numbers improving anytime soon as banks are aware of the heightened economic risk baked into the credit markets.
Furthermore, Upstart faces cost pressure. The company reported a fourth-quarter loss of eleven cents per share, primarily due to heightened research and development (R&D) costs. Such R&D costs will likely remain a problem, given the possibility of rising competition in the AI-banking space.
Approximately 36.64% of UPST stock’s float is sold short, communicating the market’s bearish view. UPST stock is down by nearly 40% since the turn of the year and I think a contrarian bet on UPST stock will crush you.
Armour Residential (ARR)
Armour Residential (NYSE:ARR) is a mortgage real estate investment trust (MREIT) with primary exposure to U.S. fixed-rate loans.
Most of Armour Residential’s portfolio consists of loans backed by the U.S. Government. However, severe oscillations in the firm’s profitability exist because of its capital structure. Armour Residential usually finances its acquisitions with repurchase agreements, meaning it short-sells short-dated bonds and subsequently reinvests the proceeds into mortgages. This is a hazardous strategy in the current economy, as an inverted yield curve and volatile mortgage premiums introduce unpredictable value fluctuations.
Armour Residential reported its fourth-quarter financial results last month, revealing a loss per share of two cents. Moreover, Armour Residential recently filed for a mixed-shelf offering, indicating that liquidity issues are brewing.
Lastly, ARR stock is under severe sentiment pressure after a nearly 30% year-over-year drawdown. I’m staying away from this one!
On the date of publication, Steve Booyens 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.
