It could be potentially stormy this earnings season, given a tense economic backdrop due to the high inflation, rate hikes, and the banking crisis. So, it could be wise to avoid fundamentally weak stocks DLocal (DLO), Kura Sushi (KRUS), Kirkland (KIRK), and Freeline Therapeutics (FRLN), which are gearing up to release their earnings report. Read more.
Investors are looking forward to an interesting week ahead as the March jobs report is due later this week. Also, a handful of companies will be releasing their quarterly earnings report.
DLocal Limited (DLO), Kura Sushi USA, Inc. (KRUS), Kirkland’s, Inc. (KIRK), and Freeline Therapeutics Holdings plc (FRLN) are expected to release quarterly reports this week, and I believe it could be wise for investors to avoid these stocks for reasons discussed throughout this article.
According to Trading Economics, the labor market is expected to remain strong as the March jobs report is likely to show that the U.S. economy added 238,000 nonfarm payroll jobs, with the unemployment rate remaining steady at 3.6%.
Amid the worst banking crisis that unfolded since the global financial crisis of 2008, the Federal Reserve announced a 25 basis point rate hike last month in line with analyst expectations. However, chances of higher interest rate hikes remain as inflation is still above the Fed’s comfort level. Moreover, another month of strong jobs addition would keep the central bank jittery.
If the Fed funds rate climbs higher this year, the economy will likely tip into a recession. This could keep the stock market under pressure. In addition, Morgan Stanley believes this earnings season could be the next risk to equities.
“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” Morgan Stanley’s Michael Wilson said.
Companies with poor fundamentals and weak growth prospects might struggle to sustain gains amid such circumstances. Therefore, I think it could be wise for investors to avoid fundamentally weak stocks DLO, KRUS, KIRK, and FRLN.
Let’s dive deeper into these stocks to see what makes them best avoided this week.
DLocal Limited (DLO)
Headquartered in Montevideo, Uruguay, DLO operates a payments platform in the United States, Europe, China, and internationally. Its payment platform enables merchants to get paid and make payments online. The company serves commerce, streaming, ride-hailing, financial services, advertising, software-as-a-service, travel, on-demand delivery, gaming, and crypto industries.
On November 16, 2022, hedge fund Muddy Waters said that it was shorting DLO as there were many “red flags” in the most recent accounts last filed in 2020. It alleged concerns about the control of client funds and noted a multi-million deficit in DLO’s 2020 cash flows and merchant funds-related accounts.
On December 1, 2023, the fund said that DLO’s books showed numerous discrepancies, adding that it was “more convinced than before” that DLO had used client funds to pay a special dividend to its shareholders before its IPO. In its defense, DLO said that the Muddy Waters report “contains numerous inaccurate statements, groundless claims, and speculation.”
In terms of forward Price/Sales, DLO’s 11.42x is 431% higher than the 2.15x industry average. Its 10.17x trailing-12-month EV/Sales is 425.5% higher than the 1.94x industry average. Likewise, its 11.93x forward P/B is significantly higher than the 1x industry average.
DLO’s total payment volume (TPV) growth for the third quarter ended September 30, 2022, came in at 51% year-over-year, compared to 217% growth in the year-ago quarter. Its adjusted EBITDA margin came in at 37.2%, compared to 38.3% in the prior-year quarter.
Its profit for the period increased 64.4% year-over-year to $32.34 million. In addition, its EPS came in at $0.10, representing an increase of 66.7% year-over-year.
It failed to surpass the consensus EPS estimate in three of the trailing four quarters. Over the past year, the stock has declined 48.1% year-over-year to $16.22.
DLO’s weak prospects are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a D grade for Value, Momentum, Stability, and Sentiment. It is ranked #42 out of 46 stocks in the D-rated Consumer Financial Services industry. Click here to see the other ratings of DLO for Growth and Quality.
Kura Sushi USA, Inc. (KRUS)
KRUS operates technology-enabled Japanese restaurants in the United States. The company’s restaurants provide Japanese cuisine through an engaging revolving sushi service model known as Kura Experience.
In terms of forward EV/EBITDA, KRUS’s 76.87x is 718.2% higher than the 9.40x industry average. Its 3.85x trailing-12-month EV/Sales is 244.2% higher than the 1.12x industry average. Likewise, its 3.48x forward Price/Sales is 302.5% higher than the 0.86x industry average.
For the fiscal first quarter ended November 30, 2022, KRUS’ total operating expenses increased 33.4% year-over-year to $41.47 million. Its net loss widened 63.8% year-over-year to $2.09 million. The company’s adjusted EBITDA declined 19.6% year-over-year to $637 million. In addition, its loss per share came in at $0.21, widening 61.5% year-over-year.
For the quarter ended February 28, 2023, KRUS’ EPS is expected to remain negative. Over the past six months, the stock has declined 10.5% to close the last trading session at $65.84.
KRUS’ POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system.
Within the Restaurants industry, it is ranked last out of 46 stocks. It has a D grade for Value, Stability, Sentiment, and Quality. To see the other ratings of KRUS for Growth and Momentum, click here.
Kirkland’s, Inc. (KIRK)
KIRK operates as a specialty retailer of home furnishings décor in the United States. The company’s stores provide various merchandise, including holiday décor, furniture, textiles, ornamental wall décor, decorative accessories, art, mirrors, home fragrance, lighting, floral, housewares, and gifts. The company operates physical stores and an e-commerce website.
On January 11, 2023, KIRK announced its comparable sales for holiday 2022, which included the first two months of the fourth quarter. Comparable sales for the fiscal fourth quarter through December 2022 decreased 5.5% year-over-year.
This includes comparable sales remaining flat for November 2022 and an 11% decrease for December 2022, both compared to the prior-year period.
Due to the larger-than-anticipated decline in comparable sales for the month of December 2022, KIRK’s Home now expects to end the fiscal year with approximately $15 million to $17 million in net borrowing, and it expects to end the fiscal year with inventory closer to the high end of the range between $70 million and $80 million.
KIRK’s net sales for the third quarter ended October 29, 2022, declined 8.8% year-over-year to $130.96 million. Its adjusted net loss came in at $4.84 million, compared to an adjusted net income of $7.34 million in the year-ago period. The company’s gross profit declined 34.4% over the prior-year period to $32.69 million.
Also, its adjusted loss per share came in at $0.38, compared to an adjusted EPS of $0.51 in the year-ago period. In addition, its adjusted EBITDA loss came in at $1.66 million, compared to $14.83 million in the prior-year quarter.
Analysts expect KIRK’s EPS for the quarter ended January 30, 2023, to be negative. Its revenue for the same quarter is expected to decline 8.1% year-over-year to $161.95 million. It failed to surpass consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has declined 69.3% to close the last trading session at $2.85.
KIRK’s grim prospects are reflected in its POWR Ratings. It has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It is ranked #54 out of 56 stocks within the Home Improvement & Goods industry. It has a D grade for Growth, Momentum, Stability, and Quality. Click here to see the other ratings of KIRK for Value and Sentiment.
Freeline Therapeutics Holdings plc (FRLN)
Based in Stevenage, the United Kingdom, a clinical-stage biotechnology company. It develops transformative adeno-associated virus (AAV) vector-mediated gene therapies. It is focused on improving patient lives through one-time treatments for chronic debilitating diseases.
For the nine months ended September 30, 2022, FRLN’s net loss narrowed 37.6% year-over-year to $65.97 million. Its loss per share narrowed 61.1% year-over-year to $1.15. Also, its loss from operations narrowed by 27.3% year-over-year to $78.57 million.
For the quarter ended December 31, 2022, FRLN’s EPS is expected to remain negative. Over the past year, the stock has declined 59.4% to close the last trading session at $0.46.
FRLN’s bleak prospects are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.
It is ranked #300 out of 484 stocks in the Biotech industry. FRLN has an F grade for Quality and a D for Momentum. Beyond what we stated above, we have also given FRLN grades for Growth, Value, Stability, and Sentiment. Get all the FRLN ratings here.
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DLO shares rose $0.24 (+1.48%) in premarket trading Monday. Year-to-date, DLO has gained 4.17%, versus a 7.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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