Following the smart money can tip you off about good investment ideas and positions that you should trim from your portfolio. These investors have more time to research their investments and often have large teams doing their research. A lot of thought goes into each decision made by smart money. Emotions less easily sway this group; they have many years of Wall Street experience.
Investors shouldn’t make decisions solely based on what someone else does. It is important to conduct your research while considering what others say about a stock or how they trade it. However, patterns may emerge if you follow the smart money for a while, and stocks that previously looked good can end up being duds in the future. Furthermore, some stocks on the path to recovery may post disappointing results that indicate a return to all-time highs is unlikely. These are some of the red-flagged stocks to avoid that the smart money is dumping.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) has been enduring a tough year. Shares are down by 42% year-to-date as growth has stopped. Total revenue dropped by 9% year-over-year in the first quarter due to lower electric vehicle sales. Although bullish investors treat Tesla like a tech company, automotive sales made up $17.4 billion of the car company’s $21.3 billion in Q1 2024 revenue, or roughly 82% of total revenue.
GAAP net income dipped by 55% year-over-year as Tesla had to lower its prices to keep up with competitors, especially in China. Tesla is losing market share in this critical market as Chinese EV makers rise to the occasion. Tesla stock has gained over 1,000% over the past five years and enjoyed a parabolic rise during the pandemic. However, a 51 P/E ratio is excessive for an automobile company with profit margins that resemble other car companies.
Udemy (UDMY)
Udemy (NASDAQ:UDMY) has been a tough hold for long-term investors. Shares are down 38% year-to-date and have shed 69% of their market value over the past five years. Short interest is surging for the stock as more investors want to profit from its decline.
Udemy reported 12% year-over-year revenue growth in the first quarter while narrowing its losses from $44.5 million to $18.3 million. However, the company only reported a 4% year-over-year growth rate in monthly average buyers in the consumer segment. A low growth rate in this area suggests that revenue growth is limited. Guidance concedes this fact, as a $795 to $805 million revenue range for fiscal 2024 is only a 9.7% year-over-year growth rate from fiscal 2023 revenue of $729 million.
The company relies too much on course discounts to generate sales. Continuously using discounts can cheapen the perceived quality of courses and result in less traction. Growth rates have been slowing down for years, and as it’s still burning through cash, Udemy needs to meaningfully reaccelerate growth rates to justify its current stock price. That doesn’t seem to be happening.
Peloton (PTON)
Peloton (NASDAQ:PTON) has been in free fall since the pandemic ended. Many people bought Peloton bikes during lockdowns to continue their workouts. However, the company amassed an excessive valuation as investors became too speculative without considering whether growth was sustainable.
Unsurprisingly, Peloton’s growth declined, but the fall has been quite dramatic. Shares are down by 42% year-to-date and are more than 95% removed from their all-time highs. The company is also losing top talent left and right. Three top instructors are leaving the platform. Peloton has a revolving door of CEOs and has lost two so far.
The overpriced bikes and monthly subscription make the gym feel like a no-brainer if you had to choose between the two. Many consumers think that way and have been voting with their wallets. Peloton reported a 4% year-over-year revenue drop in the first quarter, losing 1% of its members year-over-year. A declining membership base, lower revenue and high net losses don’t paint a good picture for long-term investors.
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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.