As the saying goes, what goes up must come down. This adage holds true for three stocks. With the market seemingly inflated, it’s vital to identify the warning signs of potential crashes before they occur. These stocks hold solid weaknesses and red flags that could signal an imminent burst in their respective bubbles.
The first one grapples with declining retail unit sales and deteriorating credit quality. The company wrestles with declining sales and mounting credit risks. The second one faces volatility in flight equipment sales and uncertain revenue patterns. It is reliant on the unpredictable currents of flight equipment sales.
Meanwhile, the third experienced setbacks in the clinical trial data release, raising doubts about its growth. Its growth looms around the release of critical clinical trial data. By identifying these vulnerabilities early on, risks can be minimized, and portfolios can be protected.
Read more to dissect the fundamentals behind these stocks. Understanding when to unload these stocks may safeguard investments as the pressure mounts and uncertainties loom.
America’s Car-Mart (CRMT)
America’s Car-Mart (NASDAQ:CRMT) is attached to several fundamental downsides. These downsides breed severe issues with its valuation growth. For instance, in Q2 fiscal 2024, retail unit sales decreased by 4.6% year-over-year (YoY). A decline in retail unit sales suggests prevailing adversities in attracting clients and capturing market demand trends. This weakness is bred from numerous factors, such as economic conditions, affordability adversities, or operational edge.
Additionally, net charge-offs as a percentage of average finance receivables boosted to 7.2% in Q2 from 5.8% in Q2 2023. The considerable increase in net charge-offs suggests deteriorating credit quality. In short, there is an increase in default rates among customers. This trend could indicate adversity in managing credit risk, potentially leading to financial losses and hindering growth.
Furthermore, the allowance for credit losses increased from 23.91% to 26.04% sequentially. This is resulting in a $28 million charge to the provision. The considerable increase in the allowance for credit losses reflects management’s recognition of higher credit risk and potential losses. This weakness could impact the bottom line and cash flow, limiting the company’s capability to invest in growth initiatives.
Moreover, the gross margin percentage declined sequentially by 0.3%. Despite YoY improvements, this sequential decline in gross margin suggests adversity in maintaining profitability under ongoing fluctuating sales volumes and cost pressures. This weakness is based on inefficiencies in cost management or pricing strategies, potentially impacting consolidated performance.
Finally, implementing the new loan origination system (LOS) led to operational issues and impacted sales volumes. Moving forward, operational adversities associated with the new LOS could disrupt sales processes, client acquisition, and underwriting efficiency.
AerSale (ASLE)
AerSale’s (NASDAQ:ASLE) top and bottom lines heavily depend on the timing and volume of flight equipment sales. While the company had a considerable boost in revenue and adjusted EBITDA, much of this growth is based on higher flight equipment sales in Q3 2023 compared to 2022. However, flight equipment sales may fluctuate considerably from quarter to quarter, leading to a lumpy revenue pattern.
Furthermore, the reliance on the pacing of flight equipment sales injected high uncertainty and unpredictability into AerSale’s performance. Several flight equipment sales were projected for Q3 2023 but were delayed and expected to close in Q4. This dependency on the timing of sales may create adversity in constantly meeting revenue and profitability targets.
Fundamentally, the weakness in the timing of flight equipment sales is exacerbated by external market factors, such as fluctuations in the freight market and shifts in consumer demand. The softening of the air cargo market and tightening financial market conditions (Fed’s higher for longer) could prolong the sales cycle of certain aircraft inventory. As a result, this may continue to impact AerSale’s capability to realize revenue in a projected manner. For instance, while Q3 2023 saw a considerable boost in revenue ($92.5 million) compared to Q3 2022 ($51 million), this growth was primarily based on higher flight equipment sales.
As a chain reaction, AerSale’s stability issues may impact its capability to service debt obligations. Revenue volatility could affect the company’s ability to derive sufficient cash flows, leading to delays in meeting regular interest payments and predetermined principal repayments (on outstanding debt). Hence, this could lead to credit rating downgrades or increased borrowing costs.
Annovis Bio (ANVS)
Annovis Bio (NYSE:ANVS) has a delay in the release of clinical trial data, particularly for the Phase III study of ‘buntanetap’ in Parkinson’s disease. Meanwhile, since the specific duration of the delay is not yet clear, the initial timeline set for the end of January 2024 was not met. This delay could have considerable implications for the company’s growth potential.
Given its advanced stage, the Phase III trial for ‘buntanetap’ likely involved many patients. A Phase II/III study in Alzheimer’s disease was completed involving 353 initially enrolled patients, out of which 327 concluded the trial successfully. Similarly, the Phase III trial in Parkinson’s disease would likely involve a comparable or larger number of patients.
The delay in data release also suggests potential adversity in meeting previously set timelines. The postponement indicates a deviation from this expectation. This could lead to uncertainty and negative market sentiment, impacting the company’s stock price and overall market perception.
Moreover, delays in data release could lead to regulatory scrutiny and delays in the approval process for Buntanetap. Regulatory agencies typically require comprehensive data analysis and validation before approving new drug candidates. Any delays in this process could prolong the time to market for Annovis Bio’s products, impacting revenue generation and market penetration.
Finally, the company remains blinded to the data (still cleaning), indicating that statistical analysis still needs to be performed sharply. Statistical analysis is vital in interpreting clinical trial results and determining the efficacy and safety of investigational drugs. Therefore, Annovis Bio’s need for meticulous data cleaning suggests potential data quality or consistency adversities, necessitating rigorous statistical methods to ensure accurate interpretation.
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.