Exploring the risk factors and market indicators affecting the trio’s value expansion
February triggered a rollercoaster ride through the stock market’s twists and turns. Amidst the cacophony of growth stocks to sell, three names echo the market with a hint of fundamental caution.
Once labeled castles of value potential, these growth stocks stand at a dangerous crossroads. From the bustling aisles of automotive retail to the lofty heights of aerospace and defense and the promising frontiers of biotechnology, each sector carries its tale of uncertainty.
Discover the allure of growth stocks compared against the backdrop of looming risks. Read more to heed the melody of caution these growth stocks to sell create in February’s market moves.
America’s Car-Mart (CRMT)
A concerning trend exists in America’s Car-Mart’s (NASDAQ:CRMT) net charge-offs. The net charge-offs as a percentage of average finance receivables rose to 7.2% from 5.8% YOY. This significant increase in net charge-offs signifies a deterioration in the credit quality of the company’s loan portfolio. Theoretically, when borrowers default on their loans, it leads to write-offs. This directly reduces the company’s net income and weakens its position.
Additionally, the ongoing adverse economic phase may lead to higher default rates as consumers struggle to meet financial obligations. Moreover, due to inflation, changes in consumer preferences or purchasing behavior may continue to impact the performance of certain loan segments. For example, shifts towards online shopping or alternative transportation options affect the demand for America’s Car-Mart’s vehicles and, therefore, the performance of its loan portfolio.
Furthermore, America’s Car-Mart adjusted its allowance for credit losses in response to the rising credit losses. A reserve is set aside to cover potential losses from defaulted loans. The company increased the allowance for credit losses sequentially from 23.91% to 26.04%, resulting in a $28 million charge to the provision expense. The increased credit risk within the loan portfolio requires the company to build adequate reserves to absorb potential losses.
Financially, the provision for credit losses directly impacts the company’s profitability and capital adequacy. By increasing the provision for credit losses, America’s Car-Mart acknowledges the heightened risk environment and takes proactive measures to protect its financial stability. However, prolonged higher provisions for credit losses can also lower reported earnings in upcoming quarters.
For AerSale (NASDAQ:ASLE), the variability in flight equipment sales affects its performance and valuations. AerSale acknowledges that its quarterly performance tends to be “lumpy” due to the timing of flight equipment sales. This indicates that revenues can vary significantly from one quarter to another, impacting overall performance and stability. In detail, Q3 2023 sales stand at $92.5 million against Q3 2022 sales at $51 million.
While there is sequential growth in sales, the Q3 2023 results trailed internal forecast expectations. This suggests that the company’s performance did not meet its projected targets for the period. The gap between actual and projected sales reflects the uncertainty and variability in AerSale’s topline projections, affecting its capability to meet investor expectations.
There are potential delays in closing several flight equipment sales slated for Q3, with expectations of some sales rolling into Q4. This delay in revenue recognition impacts the timing of cash inflows and may lead to revenue shifting between quarters. Hence, these deferred shifts in cash flows may continue to impact valuations.
Moreover, gross margin is also impacted by the mix of flight equipment sales. For instance, Q3 2023’s gross margin was 25.4%, while Q3 2022’s gross margin was 30.4%. The decline in gross margin from Q3 2022 to Q3 2023 indicates the impact of the mix of flight equipment sales on profitability.
One of the factors contributing to this margin compression is operating expenses, specifically selling, general and administrative (SG&A) expenses. Q3 2023 SG&A expenses increased by $25.4 million compared to SG&A expenses of $24 million (Q3 2022). Overall, this growth momentum in operating expenses may continue to impact the company’s bottom line and, as a result, its valuation.
Annovis Bio (ANVS)
Annovis Bio’s (NYSE:ANVS) postponement of the Phase III study data release for buntanetap in Parkinson’s disease reflects a fundamental weakness. This may hinder the company’s rapid growth potential. The delay was based on ongoing data-cleaning moves to ensure the accuracy and reliability of the study results. While the focus on data integrity is vital, the postponement raises concerns regarding the company’s capability to hit timelines.
Additionally, Phase III trials are a critical stage where the efficacy and safety of a drug are tested on a larger scale. This serves as a vital point for regulatory submissions and market approval. Any delays in the completion or announcement of Phase III study results breed a considerable downside risk for valuation.
Moreover, the decision to postpone (initiate set for January 2024) the data release suggests complexities encountered during the data cleaning process. These delays in study timelines may erode market sentiment for Annovis Bio’s execution capabilities. This loss of developmental credibility may have long-term repercussions, impacting the company’s ability to attract further funding, form strategic partnerships and sustain value growth. Thus, this has been integrated into the stock price since the beginning of 2024.
Furthermore, the short interest rate on Annovis Bio’s stock is at nearly 13%. This delay may continue to create opportunities for short-sellers to capitalize on this uncertainty and volatility. These short-term fluctuations in the stock price and variability in the developmental path logically undermine long-term value creation.
Finally, the delay in the Phase III study data announcement impacted Annovis Bio’s competitive edge. Hence, the delay in study data can cause a delay in the drug’s push to market, which will continue to adversely impact Annovis Bio’s market share and value potential.
On the date of publication, Yiannis Zourmpanos did not hold (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.