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When a badly beaten down stock suddenly springs to life, many investors wonder whether the long hoped-for turnaround has finally arrived. They've licked their wounds and bided their time, but now that the stock surged, maybe it is time to ride the stock for even more gains.
Maybe, but the three stocks below that rose on average 38% last week are not the ones you want to climb aboard. Their stocks were depressed for a good reason. Although the shares have not given back all the gains, the long-term outlook for their businesses hasn't changed. If you made any profits on the run-up, now is the time to sell and enjoy your good fortune. If you've been on the sidelines and looking for a reason to buy in (but why?), here is why you should still avoid them.
Key Points About This Article:
- Investors looking to buy low and sell high may believe these three beaten down stocks that recently surged an average of 38% are ready for their breakout. Caution is still needed.
- Peloton Interactive , Redfin , and BigBear.ai Holdings should still be avoided because they have significant problems they need to overcome first.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report . It features a software stock we’re confident has 10X potential.
Peloton Interactive (PTON)
Woman on a Peloton Interactive connected fitness Bike
Peloton Interactive ( NASDAQ:PTON ) was the big gainer of the trio. Shares of the connected fitness stock jumped 53% last week and notched a 35% gain in a single day. The catalyst for the move higher was Peloton's fiscal fourth quarter earnings report showing sales increasing 0.2% year-over-year while simultaneously narrowing its losses.
If you're thinking those are hardly the kinds of numbers to set off market-beating increases, you're right. Peloton was only able to close the gap on losses because it fired 15% of its workforce and slashed its marketing budget. Cutting costs to the bone tends to staunch the hemorrhaging, but it is not something that can continue indefinitely.
Earlier this year private equity was sniffing around Peloton for an acquisition, so it responded by trying to make its business look better. Most surprising was probably the slight year-over-year sales increase, which was its first one in over two years.
Yet Peloton still faces a host of problems. The number of members fell 2% to 6.4 million, paid connected fitness subscriptions fell 1% to 2.98 million, and ending paid app subscribers plummeted 26% to 615,000. This is hardly a growth company and should be avoided.
Redfin (RDFN)
House for sale by Redfin
Digital residential real estate marketplace Redfin ( NASDAQ:RDFN ) was the second-biggest gainer with a 34% stock price increase. Shares soared after Federal Reserve chairman Jay Powell issued his most dovish comments yet about interest rates, which indicated the central bank would begin cutting rates as soon as its next meeting in September. Rate cuts could help spur a new round of home buying, which has lagged in 2024. The remarks also came as July home closings rose 1.3%, the first time in five months sales increased.
Mortgage rates that had been over 7% in June, fell to 6.5% in July. Interest rate cuts by the Fed could push them even lower.
Redfin is undergoing a complete shift in its business model. Where it used to pay real estate agents a salary, it realized it couldn't afford to do that in a sluggish housing market and began transitioning to its Redfin Next program, which is just the typical commission system used by most agencies. Although Redfin makes a big deal about it, the program is just oriented to agents and does little to impact home sale closings.
It also faces a very difficult competitive environment with rival Compass ( NYSE:COMP ) becoming the dominant brokerage. As Redfin has just a 0.77% share of the market , it is an afterthought in real estate, and probably why it has given back 21% of the gains it made.
BigBear.ai Holdings (BBAI)
Digital screen with data charts
The third big move for the week was BigBear.ai Holdings ( NASDAQ:BBAI ), an AI data mining and analytics firm specializing in simplifying complex enterprise data. Its stock rocketed 29% higher last week -- and had been up as much as 34% -- after securing a piece of a $2.4 billion contract with the Federal Aviation Administration.
BigBear was named a subcontractor to IT company Concept Solutions , which was one of 14 companies awarded a Federal Aviation Administration information technology contract. The contract is spread over 10 years.
The risk with BigBear is its customer concentration and reliance upon such partnerships to grow. One of the causes of the data analytics firm's previous decline (shares are down 67% from their 52-week high even after the recent run-up), was the winding down of an Air Force contract and the bankruptcy of one of its biggest customers, Virgin Orbit .
BigBear.ai has missed its sales expectations every year as a public company. The meme stock has had better success during meme stock bubbles and should be avoided despite its recent run higher.
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