When Wall Street turns bearish on a stock, it’s worth paying attention. These calls stand out because analysts rarely issue grim ratings on companies for fear their firms will lose out in other business lines such as M&A advisory.
Whatever the consensus opinion may be, our team at StockStory cuts through the noise by conducting independent analysis to determine a company’s long-term prospects. Keeping that in mind, here are three stocks facing legitimate challenges and some alternatives worth exploring instead.
Microchip Technology (MCHP)
Consensus Price Target: $63.34 (9.2% implied return)
Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.
Why Do We Avoid MCHP?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.6% annually over the last five years
- Inability to adjust its cost structure while its revenue declined over the last five years led to a 11.6 percentage point drop in the company’s operating margin
- Free cash flow margin shrank by 16 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $58.01 per share, Microchip Technology trades at 51.4x forward P/E. To fully understand why you should be careful with MCHP, check out our full research report (it’s free).
Somnigroup (SGI)
Consensus Price Target: $70.50 (9.8% implied return)
Established through the merger of Tempur-Pedic and Sealy in 2012, Somnigroup (NYSE: SGI) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products
Why Are We Hesitant About SGI?
- Annual revenue growth of 4.6% over the last two years was below our standards for the consumer discretionary sector
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Somnigroup is trading at $64.18 per share, or 22.4x forward P/E. If you’re considering SGI for your portfolio, see our FREE research report to learn more.
Avis Budget Group (CAR)
Consensus Price Target: $116.75 (-0.8% implied return)
The parent company of brands such as Zipcar and Budget Truck Rental, Avis (NASDAQ: CAR) is a provider of car rental and mobility solutions.
Why Is CAR Risky?
- Demand for its offerings was relatively low as its number of available rental days - car rental has underwhelmed
- Diminishing returns on capital suggest its earlier profit pools are drying up
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Avis Budget Group’s stock price of $117.68 implies a valuation ratio of 3.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why CAR doesn’t pass our bar.
Stocks We Like More
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 176% over the last five years.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today for free.
