Amid higher interest rates and volatile economic data, the economy will likely slow down gradually and potentially nosedive into a recession. Despite gaining solid momentum recently, we think investors should wait before buying risky stocks Robinhood Markets, Inc. (HOOD), Transocean Ltd. (RIG), and Harbor Custom Development, Inc. (HCDI). Let’s discuss this in detail.
The Federal Reserve increased interest rates nine times in just over a year to combat a four-decade-high inflation rate and took its federal funds rate to a 4.75%-5% range. In March, core inflation, a more precise gauge of underlying inflation, increased by 0.4% from February and now stands at 5.6%, surpassing headline inflation for the first time since early 2021.
With inflation remaining stubbornly high, the Fed will likely approve another interest rate hike at its next meeting in May. According to the CME FedWatch Tool, markets predict a more than 70% likelihood of a 25-basis-point rate hike next month, taking the benchmark rate to a 5%-5.25% range.
Moreover, the Gross Domestic Product (GDP), the broadest measure of economic output, grew at an annual rate of 1.1% between January and March. This represents a significant deceleration from the 3.2% growth rate between July and September and the 2.6% rate from October to December.
According to the latest CNBC All-America Economic Survey, a record 69% of the public holds negative views about the current and future state of the economy. The survey also found that about two-thirds of Americans believe their wages are falling behind inflation. And a similar proportion thinks the nation is either heading toward or already in a recession.
Further, investors are expected to continue facing challenges in picking stocks for the rest of the year due to the market’s reliance on unpredictable economic data. Mark Haefele, CIO of the Swiss bank, said, “The potential remains for this data-dependent market to keep jumping from one narrative to another for the rest of the year.” He added, “This should make it difficult for investors to navigate the coming months.”
Amid the backdrop, it seems wise to avoid fundamentally weak stocks HOOD, RIG, and HCDI, despite the strong momentum they have been showing recently. Let’s discuss these stocks in detail.
Robinhood Markets, Inc. (HOOD)
HOOD operates a financial services platform that enables users to invest in stocks, ETFs, options, gold, and cryptocurrencies. Its educational solutions, such as Snacks, Learn, Newsfeeds, and Crypto Learn and Earn, teach users investing basics, provide free premium news, and an understandable business news summary for novice investors.
On April 6, it was reported that HOOD had agreed to pay up to $10.20 million in penalties to several states due to platform outages and inadequate review processes prior to 2021. The settlement follows an investigation by several state securities regulators into HOOD’s app that shut customers out of trading during pandemic-related volatility.
HOOD agreed in principle last year to settle a proposed class action lawsuit filed by customers regarding the pandemic outages. The agreement to pay millions in penalties could erode customer trust.
HOOD’s trailing-12-month net income margin of negative 75.70% compares to the 26.46% industry average. And the stock’s trailing-12-month cash from operations of negative $852 million compares to the industry average of $165.79 million.
For the fourth quarter that ended December 31, 2022, HOOD’s transaction-based revenues decreased 29.5% year-over-year to $186 million. The company also reported a loss before income taxes of $168 million, and a net loss of $166 million, resulting in a net loss per share of $0.19. Also, as of December 31, 2022, HOOD’s total liabilities stood at $16.38 billion, compared to $12.48 billion as of December 31, 2021.
Analysts expect HOOD to report a loss per share of $0.70 for the fiscal year ending December 2023. Likewise, the company is expected to report a loss per share of $0.15 in the next fiscal year (ending December 2024). Moreover, the company missed the consensus revenue estimates in all four trailing quarters, which is disappointing.
Shares of HOOD have gained 1.2% over the past month to close the last trading session at $8.82. However, the stock has slumped 20.4% over the past six months. The stock’s lack of stability is indicated by its 24-month beta of 1.58.
HOOD’s weak fundamentals are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an F grade for Sentiment and a D for Value, Quality, and Stability. It is ranked #122 out of 134 stocks within the D-rated Software - Application industry.
Click here to see the other ratings of HOOD (Growth and Momentum).
Transocean Ltd. (RIG)
Headquartered in Steinhausen, Switzerland, RIG offers offshore drilling services to global oil and gas well operators. It rents out mobile offshore drilling rigs, equipment, and work crews for oil and gas wells. The company's clients include integrated energy companies, government-owned or controlled energy companies, and independent energy firms.
RIG’s trailing-12-month gross profit margin of 35.22% is 22.3% lower than the 45.35% industry average. Likewise, the stock’s trailing-12-month net income margin of negative 24.12% compares to the 13.62% industry average.
RIG's contract drilling revenues decreased marginally year-over-year to $2.58 billion for the fiscal year that ended December 31, 2022. The company incurred an operating loss of $31 million.
Additionally, RIG's net loss worsened by 5.1% year-over-year to $621 million, with a net loss per share of $0.89. As of December 31, 2022, RIG's current liabilities stood at $1.56 billion, compared to $1.30 billion as of December 31, 2021.
For the first quarter that ended March 2023, the company is expected to report a loss per share of $0.22. Likewise, analysts expect RIG to report a loss per share of $0.15 for the current fiscal quarter ending June 2023.
Over the past six months, RIG has gained 55% to close the last trading session at $5.75. Also, the stock has a 24-month beta of 1.64, reflecting greater volatility than the market.
RIG’s bleak outlook is reflected in its overall F rating, equating to a Strong Sell in our POWR Ratings system. It has an F grade for Sentiment and a D for Growth, Value, and Quality. The stock is ranked last among 15 stocks in the D-rated Energy - Drilling industry.
Click here to access RIG’s ratings for Momentum and Stability.
Harbor Custom Development, Inc. (HCDI)
HCDI is a real estate development company that manages the land development cycle, including land acquisition, entitlements, infrastructure construction, single and multi-family vertical construction, and the sale of various residential projects. Its projects range from residential lots and home communities to townhomes and multi-story condominiums.
On March 3, HCDI announced a 1-for-20 reverse stock split of its issued and outstanding shares of common stock. Sterling Griffin, President and CEO of HCDI, said, “Completion of the reverse split was important to maintain compliance with the minimum bid price requirement of the Nasdaq Capital Market's continued listing standards.”
A reverse stock split is often seen as a red flag for investors, indicating that a company is struggling and trying to boost its stock price artificially. In this case, HCDI's decision to do so to meet Nasdaq's minimum bid price requirement suggests a struggle to maintain its listing status and attract investors.
The stock’s trailing-12-month EBITDA margin of negative 27.58% compares to the 11.44% industry average. Furthermore, HCDI’s trailing-12-month net income margin of negative 30.54% compares to the industry average of 4.38%.
HCDI’s sales decreased 81.8% year-over-year to $4.80 million in the fourth quarter that ended on December 31, 2022. Its gross loss stood at $5.01 million, compared to a gross profit of $10.85 million in the prior year’s quarter. Also, the company’s adjusted EBITDA loss came in at $8.53 million, compared to an income of $8.29 million in the previous year’s period.
In addition, the company’s net loss and loss per share were $10.64 million and $17.47, compared to a net income and earnings per share of $5.63 million and $3.22 in the previous year’s quarter, respectively.
Analysts expect HCDI’s revenue to decline 58.4% year-over-year to $11.90 million for the first quarter that ended March 2023. The company is also expected to report a loss per share of $5.46 for the same quarter. Moreover, the company missed its consensus revenue estimates in all four trailing quarters.
The stock has plunged 38.6% over the past month and 83.8% over the past six months to close its last trading session at $3.24.
HCDI’s POWR Ratings reflect this poor outlook. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system.
HCDI has an F grade for Growth, Stability, Quality, and Sentiment. It is ranked last among the 39 stocks in the D-rated Real Estate Services industry.
In addition to the POWR Ratings I’ve highlighted, you can see HCDI’s ratings for Value and Momentum here.
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HOOD shares were trading at $8.72 per share on Thursday morning, down $0.10 (-1.13%). Year-to-date, HOOD has gained 7.13%, versus a 7.03% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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