Most of the time, I’m pretty enthusiastic about stocks. I have stocks that I like enough to hold in my own portfolio; I have other stocks that I like but not enough to buy; and, in general, I am aware of a few stocks that I think are extremely likely to perform poorly.
So, I’m a stock market bull most of the time. That doesn’t mean I don’t sometimes get bearish on individual stocks, though. On the contrary, there are some stocks that I find very questionable in almost all market conditions. In this article, I will explore two stocks I wouldn’t buy in 2024 — one because the business itself is persistently unprofitable, the other because its shares have gotten too pricey.
Lightspeed
Lightspeed Commerce (TSX: LSPD) is a Canadian point-of-sale (POS) software company. It develops POS systems, including debit/credit card reader machines, as well as e-commerce software similar to that developed by Shopify. The company has enjoyed high revenue growth rates for most of its life as a public company; the problem is that it has struggled to turn any of that revenue into profit.
Why do I find Lightspeed questionable?
First, we need to look at where all the company’s growth has come from. If a company is constantly growing but not making any money, you have to wonder whether the revenue growth is sustainable. I noted LSPD’s persistent losses when I last checked in on it months ago, and when I did research for this article, I found the same thing held true in the first quarter. Despite 27% revenue growth, the company lost $35 million or $0.23 per share. The fact that these losses have continued throughout LSPD’s entire history as a public company indicates that there may be something amiss in its business model.
Second, the company doesn’t have a great brand identity. It isn’t particularly recognizable. Unlike Shopify, which it is often compared to, LSPD doesn’t have a recognized product that everybody wants to use. Instead, it sells POS terminals and card readers that look and feel a lot like the ones the competition offers. So, there’s not a whole lot of differentiation here.
Royal Bank of Canada
Royal Bank of Canada (TSX: RY) is a Canadian bank stock that I’d been positive on earlier this year but now believe to be too expensive due to the considerable gains it made recently. I should make it clear that my bearish opinion on RY right now is different from my opinion on LSPD. I think that Lightspeed is questionable as a business, but that Royal Bank is a good business that has gotten too pricey.
Based on valuation multiples/ratios, RY is among the most expensive Canadian banks. At today’s prices, it trades at the following:
- 15 times earnings
- 4.3 times sales
- 2.11 times bank
You might wonder why I am calling these multiples high when they’re below the S&P 500 average. The reason has to do with how bank stocks are valued. Banks are highly leveraged, meaning that earnings and equity can be wiped out quickly during economic crises. For this reason, and because of slow expected growth, investors typically demand P/E ratios in the eight to 10 range on bank stocks. Compared to that, RY is richly valued, and I wouldn’t buy it at today’s levels.
