Investing in growth stocks has proved to be the winning strategy over the past 15 years. However, investors have also seen the downside of owning speculative growth names during downturns. For instance, the one we saw in 2022 as interest rates climbed higher suddenly comes to mind.
Indeed, the well-established negative correlation between rising interest rates and high-performing growth stocks led to an expected price decline in the following. True, 2023 has been a much better year across the board for some high-growth stocks. But two of the following names remain down on a year-to-date basis (YTD).
Thus, investors looking to gain a more defensive exposure right now may want to avoid these growth stocks at all costs. It may not be another 2022-like decline, given how far these stocks are down from their peak.
However, we could be in for a difficult few years in the growth realm, so diversifying away from these stocks may be a winning strategy.
Coinbase (COIN)
On November 27, 2023, Coinbase (NASDAQ:COIN) Global Inc.’s Chief Legal Officer Paul Grewal executed a significant stock sale, parting with 29,607 shares. This notable transaction garnered attention from investors and analysts. Grewal’s background is in technology and intellectual property law. So, he plays a crucial role in overseeing legal affairs and regulatory compliance for Coinbase. Truly, his expertise has been vital in navigating the intricate regulatory landscape of the cryptocurrency industry.
Insider selling activity is hard to pinpoint as a fundamental catalyst or reason for investors to sell. However, the company’s recent Q3 results have led to some concern among investors who have been betting on this stock as a way to play the recent crypto rally.
In fact, after releasing the company’s most recent report, shares fell 5% as investors priced in the potential for increased regulatory headwinds. Ongoing SEC-related concerns continue to hamper the stock. Indeed, this narrative could bleed into next year and potentially 2025, given the slow pace of regulators thus far.
With negative margins, projected losses, and financial metrics concerns, Coinbase’s management faces competition challenges. GuruFocus ranks this stock as a 3 out of 10 for profitability and 4 out of 10 for financial strength, indicating room for improvement.
Virgin Galactic Holdings
The once-soaring Virgin Galactic (NYSE:SPCE) faced challenges as the reality of routine space tourism unfolded. The company’s recent business plan emphasizes heavy investment and minimal revenue. So, this led to a downgrade by Morgan Stanley analyst Kristine Liwag, citing concerns and a lowered price target.
Virgin Galactic faced financial challenges in Q2 with operating expenses of $141 million surpassing revenue. Research and development costs for the Delta Class spaceship were a major driver. Unfortunately, it resulted in negative adjusted EBITDA of $116 million. The company’s negative cash flow of $135 million has raised liquidity concerns, emphasizing the need for profitability and financial sustainability.
Virgin Galactic’s success hinged on the Delta Class spaceships. So, any setbacks in their development, such as delays, technical issues, or cost overruns, could impede growth and profitability. And that would make it a stock to consider selling.
Peloton (PTON)
Peloton (NASDAQ:PTON) is a stock that’s been broadly viewed as one worth avoiding in recent years.
The company’s core business model involves investing heavily in ramping up its inventory of exercise bicycles. And they did so during the pandemic as well as offering expanded classes. But this has given way to serious concerns around churn and the company’s financials. Growth has ground to a halt, and investors looking for a reason to buy this stock don’t have much to hang their hats on right now.
Peloton’s role in promoting fitness amid the pandemic shines amid financial challenges. However, its strategy of boosting bike prices and classes overshadows sustainable growth. The company’s meteoric rise and subsequent decline echo pandemic trends. That became evident in a Q1 FY 2024 loss of $159.3 million and a 3% revenue dip to $595.5 million, highlighting ongoing struggles.
Notably, PTON stock recently declined due to a report from Deutsche Bank analyst Lee Horowitz, who downgraded it from buy to hold. He slashed the price target from $13 to $4, indicating a potential 25.5% downside. This move aligns with the consensus rating based on 28 opinions. Thus, this is a stock to sell, or at least be cautious with, at current levels.
On the date of publication, Chris MacDonald 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.