Going against a trend and shorting hot stocks doesn’t usually work out well.
As the saying goes, the market can remain irrational longer than you can stay solvent. For months (it feels like years, though), bears have been calling for an imminent Nvidia (NASDAQ:NVDA) crash. But, on the contrary, shares kept climbing and knocked many short sellers off their feet (reminiscent of meme stock mania).
But these three hot stocks are different. Rather than vague “it feels too high,” these stocks face material risks to their top and bottom lines that will be apparent over a fairly short period. If you hold any of these hot stocks, now is the time to look for an exit.
Affirm Holdings (AFRM)
Affirm Holdings (NASDAQ:AFRM) has been on a remarkable run, delivering returns beyond 180% over the past year. However, all hot stocks eventually come to an end, and the fundamental weaknesses in AFRM’s business model position it as a prime candidate for selling in 2024.
As you may be aware, Affirm’s primary offering is its buy now, pay later (BNPL) model, providing consumers with short-term micro-loans at the point of sale. However, it’s important to note that individuals gravitating towards BNPL solutions typically have lower creditworthiness. With credit card delinquency rates soaring, it’s only a matter of time before a significant portion of Affirm’s BNPL loans go unpaid.
In its latest filing, an examination of Affirm’s balance sheet reveals a notable $30 million quarter-over-quarter increase in its allowance for credit losses (anticipated delinquency write-offs). This rise occurred before the holiday sales season. That is the time when many consumers likely extended their credit card limits and relied on Affirm’s BNPL services. Overall, prevailing consumer and macroeconomic trends do not bode well for Affirm in the near term, positioning it as one of the top hot stocks to sell.
SoFi Technologies (SOFI)
Like Affirm, SoFi Technologies (NASDAQ:SOFI) is on the list of this year’s hot stocks within financial services. Also like Affirm, the hot stock’s status is overblown and subject to credit risk. While I like SOFI over the long run, and use them as my primary bank, I can’t quite get behind the overblown reaction to recent earnings.
SoFi Technologies stands out as one of the few companies capable of expanding its net loan portfolio. It has steadily increased over the past few quarters to surpass $21 billion today. However, this expansion introduces a new risk factor. SoFi’s borrowers, particularly those refinancing student loans, typically belong to a younger demographic with lower overall net worth and limited capital liquidity. Consequently, SoFi’s loan rates tend to be on the higher end, ranging from 8.99% to over 25%.
In my view, the company’s heavy reliance on personal lending exposes it to significant borrower credit risk going forward, particularly amidst a surge in consumer loan delinquency rates.
Tesla (TSLA)
I wish it wasn’t the case, but following last month’s earnings, Tesla (NASDAQ:TSLA) is one of the hot stocks investors should avoid in 2024.
While Musk rightly asserts that Tesla transcends being just a car company, with its burgeoning AI and robotics sectors holding potential for long-term success, its current focus must center on the viability of electric vehicles (EVs) in a shifting economic landscape.
Throughout 2023, aggressive price reductions led to dwindling margins. This was compounded by declining demand for EVs, signaling challenges ahead for Tesla in 2024. The predicament is not novel. As highlighted in this week’s earnings report, Tesla’s growth is expected to decelerate significantly.
Morningstar analyst Seth Goldstein succinctly captures this sentiment, stating, “Tesla is signaling that the days of 50% or even 30% to 40% growth year-over-year is not going to happen in 2024.”
Tesla’s stock has already experienced a substantial decline, down more than 20% since January 1st. For investors who have accrued sizable gains from Tesla and are willing to absorb the tax implications, better investment opportunities await this year. For those considering this a buying opportunity, avoid trying to catch a falling knife. I’m a Tesla bull in the long run. But right now, the wisest approach may be to limit Tesla’s exposure to its allocation within a standard index ETF like the SPDR S&P 500 ETF (NYSEARCA: SPY).
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.