These 3 Companies Could Spell Trouble in a Red-Hot Stock Market

June 19, 7:32 am

As the market continues to thrive, with the S&P 500 surging over 20% from its October low, it may appear counterintuitive to focus on companies to short. However, despite the remarkable market strength, it is worth noting that the surge is largely driven by the Magnificent 7: Nvidia, Tesla, Meta, Apple, Amazon, Microsoft, and Google. Meanwhile, other companies seem to be stagnating or falling behind.

In this article, we will examine three different companies and highlight a few reasons why investors should exercise caution.

Nordstrom

Nordstrom ($JWN), the American luxury department store chain, has experienced a significant surge in stock price, soaring by 23% in the last month. However, our data suggests that the company may be approaching an overvaluation.

Traditionally, luxury retailers have proven resilient during economic downturns due to their affluent customer base, who tend to spend regardless of inflation or economic fluctuations. However, the landscape has changed since the pandemic, and Nordstrom, in particular, has struggled as of late. The company anticipates a 4% to 6% decline in annual revenue this year and the company has completely withdrawn from Canada, with plans only to open lower-priced and smaller Nordstrom Rack stores. Moreover, we observe decreasing net income, high debt management risk, and weak operating cash flow.

A substantial drop of over 100% (year over year) in job postings is not indicative of confidence or growth. Furthermore, current employees perceive a bleak business outlook, citing challenges related to processing thousands of dollars in returns daily and high staff turnover. These are not favorable indicators.

Additionally, app downloads have reached a two-year low, and web traffic has declined year over year. These red flags suggest that the stock may struggle to rise further in the short term.

Funko

Funko ($FNKO), a company known for manufacturing licensed pop culture collectibles such as vinyl figurines and bobbleheads, faces uncertainty in consumer spending when individuals become more cautious with their finances.

When assessing fundamentals, Funko presents a mixed bag, with both strengths and weaknesses. One notable strength is the company's solid financial position, as indicated by various debt and liquidity measures. Conversely, weaknesses include declining net income, disappointing return on equity, and poor profit margins.

Examining alternative data, we observe a decline of over 50% in mobile app downloads within the last six months. Additionally, web traffic has decreased over the past two months. These numbers, combined with a concerning business outlook among employees and a significant slowdown in the growth of the company's social media following, cast doubt on the sustainability of its stock's nearly 50% gain since last November. We believe this trend is unlikely to continue.

Oscar Health

Our final company, Oscar Health ($OSCR), presents a more complex situation. The company has experienced exceptional growth, with revenues increasing over 50% year over year, surpassing $1 billion in quarterly revenue. Additionally, Oscar Health appointed a new CEO last quarter, an executive with a solid background at Aetna and Bridgewater. The company has generated positive cash flow in seven of the last ten quarters, demonstrating a healthy margin when achieving such results. Given that health insurance is not a novel business model, Oscar Health should be capable of achieving long-term profitability. Consequently, the stock has surged by almost 400% this year.

However, when examining alternative data, we believe this growth trajectory may be excessive. Approximately 18 months ago, Oscar Health boasted an estimated 450 open positions, according to popular job forums such as Glassdoor, Indeed, and LinkedIn, indicating growth. Today, that number has dwindled to a mere 31 open positions.

Furthermore, app downloads have declined by 50% since March, accompanied by a 20% decrease in web traffic during the same period. While these figures are estimates, it is difficult to argue that the trend is anything but negative, particularly for a technology-driven health insurance company that should exhibit increased app downloads and web traffic as signs of growth.

While Oscar Health may possess promising prospects, alternative data suggests a misalignment with its 400% surge in stock value this year.

In conclusion, amidst a robust stock market, it is prudent for investors to exercise caution and consider shorting certain companies. Three notable examples are Nordstrom, Funko, and Oscar Health. Nordstrom, despite recent stock price gains, faces challenges such as declining revenue, high debt risk, and negative employee sentiment. Funko presents a mixed bag of strengths and weaknesses, including declining net income and profit margins. Moreover, alternative data points to slow down in growth of social media followers. Oscar Health, while showing impressive growth, raises concerns with diminishing job openings and declining app downloads and web traffic. These factors suggest that these companies may be overvalued and could face challenges in the near future.

Disclaimer: The information in this article is not investment advice, do your own research.

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