3 Stocks That Could Sink Your Portfolio if You Don't Sell in Q4

The 8.2% year-over-year increase in September’s Consumer Price Index (CPI) has raised fears of the Fed responding with a fourth consecutive 75-bps rate hike in its November meeting. Major market indices have declined significantly due to recent macroeconomic headwinds. The S&P 500 has lost more than 20% year-to-date, while the Nasdaq Composite fell more than 30% over the same period.

Many economists believe the economy will soon slip into a recession as the central bank continues to stay committed to its hawkish stance. The probability of an economic downturn over the next 12 months stands at 60%, with economists expecting the labor market and demand to become casualties in the Fed’s inflation battle.

The vicious cycle of stubborn inflation and the Fed’s aggressive rate hikes can hurt individuals by negatively impacting their discretionary expenditures and businesses by slowing down demand and making borrowing more expensive.

Given such uncertain economic and market conditions, investors are advised to let go of fundamentally weak and beaten-down stocks Carnival Corporation & plc (CCL), Unity Software Inc. (U), and Affirm Holdings (AFRM) before they pull down their portfolio returns further.

Carnival Corporation & plc (CCL)

CCL is one of the frontrunners in the field of global leisure travel. The company runs its ships under various brand names, including Carnival Cruise Line, Princess Cruises, Holland America Line, P&O Cruises (Australia), Seabourn, Costa Cruises, P&O Cruises (UK), and Cunard. The company owns and operates hotels, lodges, glass-domed railcars, and motor coaches.

On October 18, 2022, CCL announced an upsizing of senior priority notes due 2028 from $1.25 billion to $2.03 billion. The Company expects to initially use the net proceeds of the offering to repay amounts drawn under the revolving credit facility. This reflects the company’s debt obligations and entails potential interest rate risk amid the Fed’s persistent hawkishness.

In the fiscal 2022 third quarter ended August 31, CCL reported an operating loss of $279 million. The company’s adjusted net loss came in at $688 million during the same period. CCL’s long-term debt also increased marginally to $28.52 billion as of August 31, 2022, compared to its November 30, 2021 levels.

Analysts expect CCL’s loss per share to come in at $0.86 for the fiscal 2022 fourth quarter (ending November 2022). This is expected to make the company register a loss of $4.68 per share for the entire fiscal year. The company has missed the consensus EPS estimates in each of the trailing four quarters.

The stock has declined 26.6% over the past month and 62.3% year-to-date to close the last trading session at $8.08.

CCL’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

CCL has a grade of F for Stability and Sentiment and a D for Quality. Within the F-rated Travel – Cruises industry, it is ranked #2 of 4 stocks.

Click here to see additional POWR Ratings for Growth, Value, and Momentum for CCL.

Unity Software Inc. (U)

U operates as a platform for creating and running real-time three-dimensional content. The company’s platform has two segments: Create Solutions and Operate Solutions. Its offerings include Unity Ads and Unity IAP (In-App Purchases) to help users monetize content, Multiplay for multiplayer game hosting, and Vivox to enable game player-to-player communications.

On September 12, 2022, it was announced that AppLoving Corp (APP) had scrapped its plans to acquire U after the latter opposed its $17.5 billion offer. This deal could have combined two prominent providers of tools for mobile developers.

For the second quarter of the fiscal year (ended June 30, 2022), U’s non-GAAP loss from operations widened by 6351% year-over-year to $44.13 million. As a result, the company’s non-GAAP net loss came in at $53.14 million, worsening 3862.5% year-over-year. Also, its quarterly non-GAAP net loss per share widened 1700% year-over-year to $0.18.

Analysts expect U’s loss per share during the third quarter of the fiscal year (ending September 2022) to widen 150% year-over-year to $0.15. The company’s loss for the current year is also expected to deteriorate 95.2% year-over-year to $0.43.

The stock has plummeted 12.8% over the past month and 77.4% year-to-date to close the last trading session at $31.37.

In concurrence with this bleak outlook, U has an overall POWR Ratings of D, which translates to a Sell in our proprietary rating system. The stock has grade D for Stability and Value.

It is ranked #21 in the 22-stock Entertainment – Toys & Video Games industry.

In addition to the above, additional POWR Ratings for Growth, Momentum, Sentiment, and Quality for U can be found here.

Affirm Holdings (AFRM)

AFRM operates a digital and mobile-first commerce platform in the United States and Canada. The company’s platform comprises three elements: point-of-sale payment solutions for consumers, merchant commerce solutions, and a consumer-focused app.

In September, AFRM announced that it would be partnering with Amazon.com, Inc. (AMZN) to introduce and extend the Pay-Over-Time Option to Customers in Canada. This comes from the company’s partnership with Intermix to enable shoppers to choose flexible and transparent ways to pay.

Despite being sentimentally favorable, these partnerships may take significant time to have a material impact on financials due to a pullback in discretionary spending due to inflation. Moreover, due to rising interest rates, such offerings may entail opportunity costs and credit risks for AFRM.

For the fourth quarter of the fiscal year 2022 ended June 30, AFRM reported an adjusted operating loss of $29.31 billion, compared to an adjusted operating income of $14.21 during the previous-year quarter. AFRM’s net loss widened 51% from the prior-year quarter to $186.39 million.

Furthermore, the company’s quarterly net loss per share worsened 41.3% year-over-year to $0.65.

Analysts expect AFRM’s loss per share for the second quarter of the current fiscal year (ending December 2022) to widen 42.1% year-over-year to $0.91. For the entire fiscal year, the company’s loss per share is expected to worsen by 27.4% year-over-year to $3.20

The stock has declined 13.8% over the past month and 79.5% year-to-date to close the last trading session at $19.53.

AFRM’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The stock has grade F for Stability and Sentiment and grade D for Quality, Momentum, and Value.

AFRM is ranked 75 among 77 stocks in the D-rated Technology – Services industry. To view all POWR Ratings for AFRM, click here.

CCL shares fell $0.03 (-0.39%) in after-hours trading Wednesday. Year-to-date, CCL has declined -61.83%, versus a -21.52% rise in the benchmark S&P 500 index during the same period.

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.

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