A stock market correction offers the opportunity to buy shares at a discount. However, these same corrections can expose companies with high valuations and limited upside potential.
The dynamics for investments often change. Stocks that were reliable picks a few years ago may have lost their charm due to weakening financials or a less optimistic outlook.
Some stocks can withstand corrections and charge back up to their all-time highs once market conditions improve. However, these three stocks look unfavorable heading into a potential market correction.
Airbnb (ABNB)
Airbnb (NASDAQ:ABNB) faces several risks that can result in decelerating revenue growth and limit its opportunities moving forward. Shares are up by 37% over the past year which was largely fueled by a rally in November.
A smaller risk is that consumers may be done with “revenge traveling.” The phenomenon started after pandemic restrictions were lifted and people could travel freely. The deceleration of this trend will result in lower revenue and profit growth for Airbnb.
Another risk is that hotels have become more affordable than Airbnb properties. Airbnb started out as a way for consumers to travel at a discount by residing in a small part of someone’s house. Now, Airbnb prices have surpassed hotel prices, which may cause some consumers to seek other options.
The biggest long-term risk of them all is local and federal regulations that can hinder the company’s growth plans. New York City has been putting some limits on Airbnb units, and other cities have also been passing policies. In San Francisco, an Airbnb host must be a full-time resident who lives in the property for at least 275 days per year.
Airbnb has contributed to higher housing prices and monthly rent payments. The cost of living is always a hot topic for consumers, but record inflation in 2021 has made it a top area of concern. These risks make ABNB stock less enticing than some of the market’s other choices.
Nike (NKE)
Nike (NYSE:NKE) has been losing ground to its rivals. The company posted low single-digit revenue for several quarters and only eked out 1% year-over-year (YOY) revenue growth in the second quarter of fiscal 2024. That whole number was rounded up from a 0.55% revenue growth rate.
While Nike is an iconic brand and a household name, investors have to look at the company’s financial strength and what it presents to current investors. New investors have been disappointed so far as shares are down by roughly 20% over the past year.
Investors can choose from athletic apparel brands experiencing higher growth rates like Lululemon (NASDAQ:LULU) and Skechers (NYSE:SKX). While a 30 P/E ratio is reasonable for some stocks, Nike doesn’t have the growth rates to justify that valuation. The company’s 1.87 PEG ratio indicates that Nike shares are currently trading at a premium.
Investors may want to trim their positions leading up to a market correction. Better opportunities avail.
Best Buy (BBY)
Best Buy (NYSE:BBY) looks like a reasonably valued stock with its 13 P/E ratio. Dividend investors may also gravitate toward the stock for its yield which is approaching 5%. However, the company faces several problems that make it a less appealing investment.
The main concern is declining revenue and earnings. Revenue dropped by 7.8% YOY while net income decreased by 5.0% in the third quarter of fiscal 2024.
Even the company’s international segment was down YOY. Notably, many retailers are achieving higher international revenue growth than domestic revenue growth. Although international revenue decreased by a lower percentage than domestic revenue, it is still concerning.
Total current liabilities are slightly higher than the company’s total current assets. Merchandise inventories make up more than 75% of the company’s total current assets. This is important to keep in mind because those inventories will become less valuable as they stay on shelves longer.
Declining revenue and earnings suggest a lower demand for Best Buy’s merchandise. Continued slowdowns can force the company to raise capital via shareholder dilution or debt. Best Buy needs to demonstrate respectable revenue and earnings growth to validate bullish investors. The stock hasn’t done that for now.
On the date of publication, Marc Guberti did not have (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.