With momentum negative today, I want to focus my attention on the most important stocks you can avoid. There are a lot of worries hitting the market right now.
The Fed is poised to raise rates by 25 basis points next Wednesday.
We’ll get the latest update on Core Inflation (PCE Index) this week.
The Debt Ceiling Crisis is just warming up…
And the Nasdaq is experiencing extremely strong negative breadth.
But let’s take our attention away from the broader market – away from the Nasdaq, S&P 500, or New York Stock Exchange.
Let’s dig into what could easily be the worst stock trading right now.
If you learn how to identify and avoid these stocks… you’ll sleep better at night.
Finding the Worst Stocks Possible
Now, we’re not talking Junk stocks in today’s article.
We’re talking about the steaming piles of garbage that shouldn’t be public.
No one should invest in these companies. Not even the CEO’s mother.
They’re that bad.
I’m talking about companies that are unprofitable.
So, we can just screen for stocks trading at negative price-to-earnings (P/E) ratios for our first part of the checklist.
Then, let’s go back to the craziest Dot-Com-style valuation metric. I’m going to use the price-to-sales (P/S) ratio.
That’s the price of the stock divided by its revenue (since they are unprofitable). A high P/S ratio is a red flag (even if it’s a growth stock).
Of course, there are great companies with high P/S ratios. Microsoft (MSFT) and Visa (V) both have really bad P/S ratios. But they’re profitable and they don’t have numbers that match the last two scenarios.
I’m looking now at a Piotroski Score under 3 and a Z Score (bankruptcy risk) under 1.5. We’re looking for management that is doing a bad job with the first metric, and a deterioration in credit standards in the second standard.
To review:
- P/E Ratio: Negative
- P/S Ratio: Over 10 (Even 20)
- F Score: 3 or Less
- Z Score: 1.5 or Less
Now, this might blow your mind. There are more than 114 companies that have these terrible metrics. However, 88 of them are healthcare related. That’s not surprising given the moonshot nature of small- to mid-tier biotech.
Hello Hot Garbage: Virgin Galactic Holdings (SPCE)
There are some interesting names on the list. Microvision (MVIS) has been a popular meme stock in recent years. Luminar Technologies (LAZR) gets a lot of attention in positive momentum markets as a short squeeze candidate.
But is there anything worse than Virgin Galactic Holdings, Inc. (SPCE)?
This SPAC stock has a negative Z score, an F score of 2, and its price-to-sales ratio is a staggering 415x.
This means that in order to justify its valuation – at a whopping $3.28 per share – the company would need to return 415 years of revenue to its shareholders. That means… no taxes… not R&D spending… no payroll.
Every dollar in the door.
Now obviously Virgin Galactic is a growth stock, but even under $4 its valuation is almost mathematically insane.
There are better “Moonshot” stocks out there. It wouldn’t be shocking to see this name go bankrupt.
Don’t do it to yourself.
Instead, focus on cheap stocks with stuff that we need in a high inflation environment.
Do you want to own a risky space tourism stock trading at 415 times sales?
Or would you prefer to own companies that make real things that we need in food, energy, housing, and more… all trading for less than the sum of their parts?
The answer in this environment should be obvious.
What’s On Tap?
Moving forward, I want to keep you up to date on what’s coming next here at TradingPub and the markets.
Obviously, the focus next week centers on the Federal Reserve and its policy meeting on May 3. Then, we’ll have Apple (AAPL) earnings to follow (a subject I’ll discuss on Friday).
But tomorrow, I want to turn your attention to a city nearly 7,500 miles from my house – in Tokyo.
Tomorrow, a major event is happening for the first time in a decade – and it could impact the U.S. economy more than the debt ceiling debate. So, tune in as I break down what it is… and what it means for your money.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Red
We are clearly in red territory, and Tactical Wealth Investor members are seeing our position on the S&P 500 SPDR ETF (SH) heading in the right direction. I’m planning to announce my latest value stock next week, but I’m very cautious about the string of negative factors impacting the market right now. We’ll be cautious – but that’s the way to handle this market until we finally have a pivot by our central bank.
