Rating my 'Stinky Six' stocks to avoid
On Tuesday, I introduced a new rating system I've developed for stocks, using my intuition and experience to organize and rank them. It's more subjective and personalized to me than something like our firm's Stansberry Score.
Using my new system, I give each stock a score of zero through 10 for two categories: "Quality" and "Valuation." On Tuesday, I applied it to my longtime favorite "Fab Four" stocks – Berkshire Hathaway (BRK-B), Alphabet (GOOGL), Meta Platforms (META), and Amazon (AMZN).
Today, I'm going to do the same analysis for the "Stinky Six" stocks to avoid that I named on October 29:
- Palantir Technologies (PLTR)
- AppLovin (APP)
- Tesla (TSLA)
- QMMM (QMMM)
- Signet Jewelers (SIG)
- Hims & Hers Health (HIMS)
QMMM is currently suspended. But the five that have traded since then are down an average of 8% versus a flat market:
Now, let's take a look at each stock in more detail and rate them accordingly...
1) Palantir's business is on fire. The company appears to be riding three waves: artificial intelligence, defense spending, and the fact that co-founder and chairman Peter Thiel has connections with President Donald Trump.
In its latest quarter, revenue grew 63% year over year ("YOY"), and net income tripled (though operating cash flow only grew 21%). Gross and net margins were also very high at 82% and 40%, respectively.
However, it's difficult to assess the business's future prospects. That's because a majority of its business involves defense contracts with the U.S. military, so it's all very hush-hush.
What is the "moat" around this business? How rapidly can it grow, and for how long? How large can it get?
These uncertainties lead me to give it a Quality rating of 7.
It's really the valuation that lands Palantir on my list of stocks to avoid...
With a $420 billion market cap, it's trading at 95 times this year's estimated revenues of $4.4 billion. And with the stock closing yesterday at $176.08, it's trading at 245 times this year's earnings-per-share ("EPS") estimates of $0.72 and 178 times next year's estimates of $0.99.
I've never seen a mega-cap stock trade at such an extreme valuation. It makes Cisco Systems (CSCO) trading at 180 times earnings at the peak of the Internet bubble look cheap! Palantir is at least four times overvalued, as I explained in my August 11 e-mail.
So I give it a zero for Valuation.
2) AppLovin's business is also booming. In its latest quarter, revenue grew 68% YOY, net income and operating cash flow nearly doubled, and gross and net margins were 88% and 60%, respectively.
But numerous credible short reports allege scammy behavior from this company, as I've noted in numerous e-mails this year. So I'm not convinced that AppLovin's growth and mouth-watering economic characteristics are sustainable. There's a real risk the business could blow up.
So I'm going to give it a Quality rating of 6.
As for valuation, the stock closed at $662.21 yesterday, giving it a $224 billion market cap. That means it's trading at 39 times this year's revenue estimate of $5.75 billion. And it's trading at 71 times and 46 times this year's and next year's EPS estimates of $9.33 and $14.49, respectively.
The stock isn't as absurdly overvalued as Palantir, but those numbers are still crazy. So I give it a Valuation rating of 2.
3) I've discussed Tesla a staggering 306 times in this daily over the years (archive here), so I won't repeat myself here too much.
In the third quarter, Tesla managed to grow revenue by 12% after two quarters of declining YOY revenue. And it reported gross and net margins of 18% and 9%, respectively. This is a modest-margin business that has been struggling to grow in recent years.
As for its future prospects, Tesla's many bulls see a future so bright that they're donning sunglasses. But I'm skeptical. As I wrote on October 29:
With its tax-credit expiration in the U.S. and competition from Chinese manufacturers, I expect Tesla's vehicle sales to collapse. I'm also very skeptical that the company's Optimus humanoid robots and the nascent Robotaxi business will take off.
So I'm giving it a Quality rating of 6.
Again, it's the valuation that's ridiculous. At yesterday's close of $446.74, it has a $1.5 trillion market cap, the 8th largest of any U.S. company and the 10th largest in the world. It's trading at 16 times this year's revenue estimate of $95 billion. And it's trading at 271 times and 197 times this year's and next year's EPS estimates of $1.65 and $2.27, respectively.
All of those multiples are insane. So it gets a zero for Valuation.
4) QMMM is the most egregious of the many China frauds in the market today. With virtually no revenue ($1.9 million), it had a $6.8 billion market cap when the Nasdaq halted trading two weeks ago. That gives it a rare double zero on Quality and Valuation!
5) I analyzed Signet on January 15 and January 16. It's an average jewelry-store business with brands like Kay Jewelers, Zales, Jared, and more.
In its latest quarter, reported two days ago, revenues rose 3%, and adjusted EPS jumped from $0.24 to $0.63. Gross margin was 37%, and net margin was a paltry 1.4%.
The stock fell 6.8% on Tuesday, however, as the company's revenue guidance for the all-important holiday quarter – when the company earns nearly all of its annual profits – was below expectations. The company's outlook is "cautious," with estimated same-store sales ranging from 0.5% to negative 5%.
My concern for the future is that the rise of lab-grown (synthetic) diamonds will impact Signet's business, making the stock a value trap. These diamonds are virtually indistinguishable from real ones yet cost as little as one-tenth as much.
An average business facing a potentially existential threat leads me to give it a 3 for Quality.
As for valuation, at yesterday's close of $89.02, it has a $3.6 billion market cap. It's trading at 0.7 times revenue, plus 9.6 times and 8.5 times this year's and next year's EPS estimates of $9.31 and $10.44, respectively.
Those are low multiples, so I give it a 7 for Valuation.
The reason it's not higher is because I don't believe the company's earnings will grow. And if they start to shrink, as I expect, the forward multiple will prove to be much higher than it appears.
6) Hims & Hers' high revenue growth – 49% YOY in its most recent quarter – is driven by highly promotional management and advertising. The company aggressively prescribes drugs for weight loss, hair loss, anxiety, depression, etc., after a brief phone consult. I think insurers and regulators are likely to crack down on this.
The stock is down 23% since I first warned about it because of the Trump administration's deal with Novo Nordisk (NVO) and Eli Lilly (LLY) to make their GLP-1 weight-loss drugs available at lower prices. This will likely hurt Hims' sales of its copycat drugs.
The company's high growth is offset by questions about its sustainability. So I give it a 4 for Quality.
And at yesterday's close of $37.07, it has an $8.4 billion market cap. It's trading at 3.6 times this year's revenue estimate, as well as 77 times and 55 times this year's and next year's EPS estimates of $0.48 and $0.68, respectively.
Those are very high multiples, so I give it a 2 for Valuation.
In summary, here are the ratings for my Stinky Six:
I recommend investors continue to avoid all of these stocks!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.