3 Stocks to Forget
These no-moat stocks have lost more than 20% this year yet remain overpriced.
Contrarians have no shortage of turns of phrase. Buy when there's blood in the streets. Invest when the chips are down. And perhaps most famously: "Be fearful when others are greedy and greedy when others are fearful." (Thank you, Warren Buffett.)
That all sounds good. But how does one know whether there won't be more blood, fewer chips, or further fear?
To help mitigate some of that risk, make sure the downtrodden names that you're considering are truly cheap. Demand a margin of safety. Put another way, limit your list to unloved stocks that are trading below our fair value estimates.
In addition, favor stocks that've built up some sort of competitive advantage, or economic moat. Firms that can successfully fend off competitors have a better chance of increasing intrinsic value over time.
To prove that beaten-up doesn't always mean attractively priced, today we're featuring three no-moat stocks that have all lost more than 20% this year but still look expensive to us, based on their Morningstar Ratings for stocks. As the updates below from our analysts suggest, these aren't terrible companies by any means--they simply lack competitive muscle and their stocks are overpriced today.
All data is as of Aug. 6, 2021.
Year-to-date return: negative 26.88%
Morningstar Rating: ★
"Farfetch is a leading global online distribution platform for personal luxury goods. It connects luxury buyers and sellers and offers a wide selection of products to consumers (3.9 million stock-keeping units at the end of 2017, or 10 times more than the next biggest peer, according to the company) without exposing itself to unsold inventory risk. While we believe Farfetch's business model exhibits traces of a network advantage moat source, we are currently wary of assigning it a moat, given the early stages of industry development, the company's small size and reach (3% share of the online luxury goods segment, reaching less than 1% of the luxury-buying population), and lack of business model monetization.
"Although the online luxury segment is still relatively fragmented (the biggest player YNAP commands around 10% share), we believe it will be dominated by a limited number of strong global players. Still, we think there is a low probability that any one player will dominate online distribution, given the market power of the big brands and their reluctance to depend on a single party for online distribution. But neither should the space be too fragmented, in our view, given that the brands are wary of overrepresentation in too many channels, with risk of brand trivialization, excess inventory, and discounting. We believe Farfetch has potential to become one of the strong players in the industry, given its value proposition to the brands (better economics than wholesale and control over inventory and pricing), retailers (which are engaged in the supply chain rather than competed with), and customers (through vast choice of products and unique items)."
--Jelena Sokolova, senior analyst
Year-to-date return: negative 24.05%
Morningstar Rating: ★★
"Zillow Group is building a one-stop shop to serve consumers along each step of the homebuying process. Early on, the company focused on expanding its audience on Zillow.com, allowing it to overtake rival Realtor.com in the race to achieve pre-eminence as the largest real estate network on the web. In 2014, Zillow acquired Trulia.com, meaning it now possesses the most visited and third most visited real estate websites by traffic. In this regard, the company's success can be attributed to its aggressive approach at building a recognizable brand to attract consumers and consequently the agents seeking their business.
"More recently, Zillow has pivoted heavily toward iBuying, where it purchases homes directly from consumers and then sells them on the open market. In pursuing this opportunity, the company has taken on considerably more risk as it chases the heady growth rates of yesteryear."
--Michael Wong, director
Year-to-date return: negative 23.01%
Morningstar Rating: ★★
"Exact Sciences has a two-prong approach to cancer screening, with noninvasive Cologuard continuing to gain share of colorectal cancer screening, and ongoing development of a liquid biopsy pan-cancer test provides exposure to a likely shift toward liquid biopsy screening. Exact is attempting to position itself as a winner regardless of whether liquid biopsy takes off, with Cologuard likely to remain a decent alternative to colonoscopy over the near term, while the firm's pan-cancer test could offset Cologuard share loss in a scenario where liquid biopsy rapidly gains share.
"Though our outlook on Exact Sciences is uncertain, with significant competition expected to enter the early-screening market over the next decade, we think its early entrant status in pan-cancer and Cologuard's existing share could help sustain growth over the next 10 years. Beyond liquid biopsy pan-cancer testing and Cologuard, Exact's Oncotype DX test for cancer treatment selection provides some diversification to the company's high opportunity/high threat status relative to the future of liquid biopsy, and growth of Oncotype should be relatively immune to liquid biopsy's adoption rate."
--Aaron Degagne, analyst
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.