Although an uncomfortable subject based on financial sensitivities, the topic of Nasdaq stocks to avoid cannot be avoided much longer. To be clear, it’s not so much about the companies specifically. Rather, with the Federal Reserve committed to its hawkish monetary policy, borrowing costs will rise. With that, the incentive for expansion-driven protocols will likely significantly diminish.
Domestically, what’s incredibly problematic is that the Fed will probably push interest rates consistently higher. Fundamentally, the unprecedented rise of the money stock warrants a significant unwinding of prior excesses. Also, Russia’s war in Ukraine worsens the central bank crisis due to artificially bolstering energy prices. Thus, Nasdaq stocks to avoid have become a rising search query.
On the international front, the World Bank sounded the alarm about global recession fears due to simultaneous rate hikes. With the underlying technology-centric index featuring many foreign companies, this dynamic only raises the stakes for Nasdaq stocks to avoid.
So, while it’s an uncomfortable discussion, it’s arguably a necessary one. Here are problematic Nasdaq stocks to avoid.
Zillow (Z, ZG)
Headquartered in Seattle, Washington, Zillow (NASDAQ:Z, NASDAQ:ZG) is an American tech real-estate marketplace company. Currently, the company commands a market capitalization of $7.91 billion. On a year-to-date basis, Z (Class C) shares dropped nearly 49% in equity value. At the peak, Zillow featured an average share price near the $200 threshold.
At the time of writing, Z stock traded hands for $32.52, reflecting severe demand loss. Frankly, among the Nasdaq stocks to avoid, Zillow represents a no-brainer. Rising rates inevitably hurt the housing market, presenting a conundrum. Basically, you can have either higher interest rates or higher home prices but you can’t have both at the same time.
Regarding the financials, Zillow looks like a value trap. For instance, while the company appears to generate class-leading revenue growth rates, the problem is that this trajectory is no longer dependable. With rates rising, the paradigm completely changed. Therefore, Zillow represents one of the Nasdaq stocks to avoid.
Headquartered in San Francisco, California, DocuSign (NASDAQ:DOCU) allows organizations to manage electronic agreements. It launched into the spotlight during the Covid-19 crisis because of its facilitating of e-signatures. Obviously, minimizing physical contact represented a top priority during the early phase of the new normal.
Today, circumstances have soured for the organization. It features a market cap of $8.2 billion. Since the start of the year, DOCU shed a staggering 74% of its equity value. At the height of its power (September 2021), DOCU commanded an average share price exceeding the $300 level. Now, it trades for just under $42, reflecting severe demand and relevancy loss.
Further, the fundamental headwind for DocuSign centers on fading fears of Covid-19. I don’t want to say nobody cares but nobody cares. Aside from this pejorative argument, just look at the financials. With middling stability in the balance sheet and poor business quality based on its underwater return on equity, DOCU ranks among the Nasdaq stocks to avoid.
Based in Beijing, China, JD.com (NASDAQ:JD) is one of the nation’s biggest e-commerce firms. It’s primarily known for its massive business-to-consumer (B2C) footprint. At the moment, JD.com carries a market cap of $69.17 billion. Since the beginning of this year, JD stock slipped 35%. In the trailing month, shares dropped 16%, reflecting poor nearer-term sentiment overall.
Of course, when dealing with Chinese companies, the main worry centers on its politics. Recently, China’s President Xi Jinping consolidated power in a norm-busting third term. Now, his administration is chock full of cronies, who will likely stifle any hint of free market reforms. Therefore, the major players in China (such as JD.com) present major fundamental risks.
Another reason to consider JD as one of the top Nasdaq stocks to avoid aligns with financial concerns. Per Gurufocus.com, JD may be a value trap. While the company enjoys a very strong revenue trek, the issue is predictability or lack thereof. With the political power consolidation, JD’s high profile may present more headaches than it’s worth.
Also based in Beijing, iQIYI (NASDAQ:IQ) represents an online video platform. Based on its public profile, the company is currently one of the largest online video sites in the world, with nearly six billion hours spent on its service each month and over 500 million monthly active users. Currently, the company commands a market cap of just over $2 billion.
Like other Nasdaq stocks to avoid based in China, IQ absorbed heavy losses. In the year so far, shares plunged over 46%. To be fair, though, optimist trading bolstered IQ in the trailing five days, lifting it by 22%. Fundamentally, this sharp rise may offer a chance for stakeholders to exit some portion of their position into strength. With investors concerned about China’s power consolidation, IQ may end up becoming an unwitting victim.
Also, don’t think that IQ’s risks merely center on politics. In contrast, Gurufocus.com labels the underlying business as a possible value trap. Structurally, the company has a weak balance sheet, with its negative Altman Z-Score reflecting a distressed enterprise. Also, IQ represents poor quality based on its hugely negative return on equity.
Headquartered in Boston, Massachusetts, Rapid7 (NASDAQ:RPD) is tethered to the cybersecurity industry. Specifically, the company focuses on network security solutions and services. Presently, Rapid7 features a market cap of $1.57 billion. From the beginning of this year, RPD dropped nearly 76% in equity value. If that wasn’t worrying enough, shares declined 38% in the trailing month.
Fundamentally, this one hurts because cybersecurity represents an incredibly relevant sector, especially in the new normal. With so many people working from home, for instance, the canvas for vulnerabilities and nefarious activities increased. Still, with such sharp losses in the market, it would be irresponsible not to at least consider it among the Nasdaq stocks to avoid.
A closer look at the financials only warrants more caution. As with the other Nasdaq stocks to avoid, Gurufocus.com rates RPD as a possible value trap. Per the negative reading of its Altman Z-Score, Rapid7 is significantly distressed. Also, its operating and net margins run in negative territory, a serious concern during this monetary environment.
Founded in 1987 and operating in Maryland, Novavax (NASDAQ:NVAX) is a biotechnology firm that develops vaccines to counter serious infectious diseases. In the early phase of the new normal, Novavax was one of the main candidates for a Covid vaccine. Currently, the company has a market cap of $1.47 billion. Unfortunately, shares slipped more than 86% YTD, easily justifying its inclusion among Nasdaq stocks to avoid.
I don’t enjoy writing these words since Novavax carried high hopes throughout the “meat” of the pandemic. Utilizing a subunit approach, Novavax offered comfort in the Covid vaccine race because subunits have been used to deliver vaccinations for other conditions. Alas, other pharmaceutical companies beat Novavax to the clinical finish line, eventually leading to sharp losses.
Of course, Novavax can pivot to other conditions. However, with Covid-19 probably being a once-in-a-century pandemic, Novavax missed out on a once-in-a-century opportunity. To be on the safe side, you should consider NVAX as one of the Nasdaq stocks to avoid.
Headquartered in Southlake, Texas, Sabre (NASDAQ:SABR) is a travel technology firm. According to its public profile, Sabre is the largest global distribution systems provider for air bookings in North America. Currently, the company commands a market cap of $1.49 billion. Since the Jan. opener, SABR dropped 49% of its equity value. Worryingly, in the trailing five days, it’s down 19%.
Fundamentally, it’s possible that the revenge travel phenomenon is running out of gas. During the roughly two years of pandemic-related lockdowns and mitigation measures, consumers dreamed of taking vacations that the crisis denied. Once restrictions faded, many folks stormed out of the home. However, with economic woes pinching the wallet, consumers may be suffering from financially driven lockdown.
Like other Nasdaq stocks to avoid, Gurufocus.com warns that SABR is a possible value trap. Glaringly, its negative Altman Z-Score suggests a business in distress and facing potential bankruptcy risk. Also, its profitability margins stand below parity, reflecting viability concerns.
On the date of publication, Josh Enomoto 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.