Generally speaking, when buying a stock, it doesn’t matter much whether it’s a good company or whether you’re investing with a long-term mindset. But that doesn’t mean it won’t help your overall return if you buy a stock that’s trading at a discount. Doing this will give you more value for your investment money.
However, not all discounted stocks are necessarily worth buying. There is always more to the story. Sometimes a stock’s setback is a warning of more trouble ahead.
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Before we dive blindly into the worst performing October S&P500 (SNPINDEX: ^GSPC) stocks simply because they suddenly trade cheaper, here’s a look at the rest of the story. You might not want to scoop them up yet.
To get straight to the point: the biggest losers of the S&P 500 last month were Super microcomputer (NASDAQ: SMCI), Qorvo (NASDAQ: QRVO), Huntington Ingalls Industries (NYSE: HII)And Estee Lauder (NYSE:EL). Every stock was downright boring for most of the month. However, in the last two days of October alone, each ticker lost about 30% versus the index’s 1% dip.
There is a common thread: the profits of the past quarter and/or the expectations for the current quarter. Many companies across a wide range of sectors are finally feeling the impact of economic challenges.
Take semiconductor company Qorvo as an example. While it beat its top- and bottom-line estimates for the three-month period ending in September, revenue expectations of about $900 million for the now-current quarter fell short of analyst consensus of $1.06 billion. The company cited intense competition and tepid demand for smartphones as the main reason for its bleak outlook.
Estée Lauder’s story is similar, though arguably worse. While fiscal first quarter results were broadly in line with expectations, they were still lower than year-ago comparisons. At the heart of the stock’s steep sell-off, however, was the company’s decision to cut its dividend and withdraw full-year guidance, mainly due to uncertainty over its business in China. Despite the country’s new stimulus efforts, CEO Fabrizio Freda explained: “Consumer confidence in mainland China further weakened in our first quarter.” He added: “We still expect strong declines for the sector in the near term.”
The underlying economic lethargy may even undermine government spending to some extent. Not only did Huntington Ingalls’ quarterly results fall short of expectations, but the shipbuilder was also forced to lower its cash flow outlook for the next five years thanks to new doubts over a U.S. Navy contract and supply chain challenges.
And a super microcomputer? It’s a bit of an outlier, as it’s the only name of the four laggards that fell for a reason other than revenue. Accounting firm Ernst & Young resigned as the company’s auditor last week, saying it was “unwilling to be associated” with the technology company that allegedly ignored the company’s concerns about Supermicro’s accounting practices and internal controls. While Ernst & Young’s departure doesn’t necessarily mean the company hasn’t achieved the stellar results it’s been reporting lately, it does raise questions.
So what now?
The discounts are certainly deep. And while every company clearly has its problems right now, none of them are insurmountable. Most of these are temporary and arise from predictably cyclical challenges. Even Super Micro Computer’s woes will eventually be put in the rearview mirror.
But this is a situation where interested investors may want to take a step back and proverbially read the room – starting with the sheer scope and scale of this sell-off.
Simply put, there’s more going on here than just overreactions to a handful of disappointing quarterly reports. These steep sell-offs are an indication of how quickly – and how decisively – the market comes to sweeping bearish conclusions.
Look, it’s not just these four tickers. While these are the worst of the worst, several dozen S&P 500 stocks posted double-digit losses in October. Some of these setbacks were profit-related. Others were just because. However, they all underscore broad concerns about future profits and the overall valuation of the market. The S&P 500’s trailing-twelve-month price-to-earnings ratio of 25 and forward-looking ratio of 24 are both above long-term bull market norms.
Perhaps without even consciously realizing it, investors are looking for ways and reasons to adjust these numbers.
And that’s what makes buying these beaten-down stocks such a dangerous proposition right now. These four names have already been identified as the main targets of the market. Right or wrong, investors could hold onto or even fan these tickers, driving them even lower before they hit their ultimate low.
What makes them even riskier is the fact that these four companies are struggling for reasons beyond their direct control, leaving them somewhat powerless to overcome their challenges.
For example, Huntington Ingalls’ business consists almost exclusively of shipbuilding for the fickle U.S. Department of Defense. Estée Lauder’s target market is also fickle, with many regular cosmetics users constantly looking for something new, and often looking for brands other than the obvious big ones.
For example, consumer research firm McKinsey reported earlier this year that almost half of Generation Z consumers try a new beauty brand every two to three months, while only 60% of this group claim to be truly loyal to a particular cosmetic brand. Between an increasingly crowded market and a lethargic economy, Estée Lauder’s future is far from promising.
Investors are finally starting to realize this, it seems.
This will not always be the case. Sooner or later, each of these companies will do better than they are today. Their shares will follow suit. After all, nothing lasts forever, not even weakness.
But until then, we have to consider the bigger hint being dropped by the sheer size and number of post-gains and guidance-driven declines. We’re in an environment where investors are quickly selling en masse, and companies can deliver just enough worrying news to trigger those sales. It may take a while to get through this difficult period. These four names are probably best avoided in the meantime, simply because they are the poster children for this dynamic.
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*Stock Advisor returns October 28, 2024
James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Qorvo. The Motley Fool has a disclosure policy.
Is It Time to Buy October’s Worst Performing S&P 500 Stocks? was originally published by The Motley Fool
