The best words to describe my view on the markets is cautiously optimistic. Over the medium to long term, it’s likely that equities will trend higher. However, the markets seem too frothy at this point of time, leaving investors to consider which stocks to avoid.
Because the S&P 500 index trading at a cyclically adjusted price-earnings ratio of 37.9, it makes sense to go overweight on defensive stocks. On the other hand, there are stocks to avoid or go underweight from relatively volatile names in the market.
One screener that can be effectively used to segregate high and low risk stocks is beta. It’s a measure of the volatility of a stock as compared to the index. Higher the beta, higher is the volatility. Therefore, with markets looking stretched, high-beta names are the stocks to avoid.
On the other hand, low-beta stocks will help in conserving profits and protecting the portfolio from capital erosion.
Let’s talk about four high-beta stocks to avoid. These high beta stocks are quality names from a fundamental perspective. However, for now, a relatively sharp correction seems likely if broad markets decline.
- Moderna (NASDAQ:MRNA)
- Freeport-McMoRan (NYSE:FCX)
- Pinduoduo (NASDAQ:PDD)
- Blink Charging (NASDAQ:BLNK)
High Beta Stocks to Avoid: Moderna (MRNA)
For the current year, MRNA stock has already surged by 265%. That’s one reason to remain cautious on any fresh exposure to the stock. It’s worth noting that analysts have a median price target of $271.50 for the stock. Currently, the stock trades significantly higher at $385.
Furthermore, MRNA stock has a high beta of 1.49. With markets trading near all-time highs, it might be a good idea to remain in the sidelines even as the company is fundamentally strong.
A new study by the company indicates that the Covid-19 vaccine maintains antibodies against variants of concern six months after vaccination. Moderna has also received approval from the U.S. Food and Drug Administration for third dose of the vaccine for immunocompromised people. However, I believe that the positive news is largely discounted in the stock price.
Moderna has a first mover advantage along with Pfizer (NYSE:PFE). Any deep correction from current levels would make the stock attractive. For the first half of 2021, the company reported revenue of $6.3 billion and net income of $4 billion. For the same period, the company’s operating cash flow was $7 billion. Given the cash flow visibility, Moderna is also well positioned to invest in research and boosting the product pipeline.
With the bull market for commodities, FCX stock has surged by 150% in the last 12 months. I believe that commodities are among the most undervalued asset class. The bull market is therefore likely to sustain.
However, in the event of any broad market correction, FCX stock is likely to decline. The stock has a high-beta of 2. Another point to note is that as inflation remains high, the first-rate hike might come sooner than expected. In any such scenario, commodity stocks can be underperformers.
Freeport reported operating cash flow of $2.4 billion for the second quarter with the price in copper remaining firm. This implies an annualized OCF of $9.6 billion. Strong cash flows have allowed the company to deleverage. Net debt has already declined from $8.4 billion in Q2 2020 to $3.4 billion in Q2 2021.
The company also expects steady growth in copper and gold sales over the next few years. Copper sales are expected to increase from 3.85 billion pounds in 2021 to 4.4 billion pounds in 2023. Therefore, the company stands to benefit from higher copper price and volume sales.
Freeport expects to incur capital expenditure of $2.2 billion in 2021 and $2.5 billion in 2022. Considering the cash flows, internal funds are likely to suffice for investment projects. The balance sheet health is therefore likely to improve further. Even with these positives, FCX stock would be in my list of stocks to avoid on possibility of a market correction.
High Beta Stocks to Avoid: Pinduoduo (PDD)
Chinese stocks have already witnessed a sharp correction due to regulatory headwinds. Investors need to be very selective in considering exposure to Chinese stocks. PDD stock has corrected from highs of $212 to current levels of $84. With the stock having a high beta of 1.4, it would still be in my list of stocks to avoid.
From a revenue perspective, Pinduoduo seems attractive. However, there is one factor that gives an edge to Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD). For Q1 2021, Pinduoduo reported operating level loss of 3.2 billion renminbi.
Pinduoduo still has a robust balance sheet with $12.7 billion in cash and equivalents. However, I believe that Alibaba and JD.com are better positioned from a value creation perspective. In particular, BABA stock looks attractive after a meaningful correction due to regulatory headwinds.
For Q1 2021, Pinduoduo reported revenue growth of 157% on a year-over-year basis to $2.2 billion. For the same period, the company reported a healthy growth in active buyers. Cash used in operations for the quarter was however $569 million.
Overall, PDD stock might not have significant downside from current levels. However, if markets correct, the stock might still be an underperformer as compared to low-beta stocks.
Blink Charging (BLNK)
BLNK stock would also be among the top stocks to avoid among high beta names. Currently, the stock has a beta of 4.2. Even if there is a 10% to 15% market correction, the downside can be meaningful for the stock.
I would mention that electric vehicle charging infrastructure still needs significant investments over the next decade. However, in the near term, BLNK stock looks overvalued. A better investment may be ChargePoint Holdings (NYSE:CHPT) over Blink Charging.
Recently, the company announced Q2 2021 results. Revenue increased by 177% on a year-over-year basis to $4.4 million. Further, for the first half of the year, revenue was $6.6 million. This would imply an annualized revenue of $13.2 million.
At a market capitalization of $1.55 billion, BLNK stock is trading at 117x revenue. The stock seems to be in a consolidation mode. However, the short interest in the stock is still over 30%.
From a long-term perspective, the stock is worth adding on deep corrections. The company already has more than 24,000 charging stations deployed. Further, the company has a wide variety of products for industrial and residential use. With presence in U.S. and Europe, there is ample scope for revenue upside over the next decade.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.