It's best to buy stocks when they are down, as one of the most famous investing maxims tells us: "Buy low, sell high." However, companies going through a rough patch on the market aren't automatic buys. It's essential, as always, to separate the wheat from the chaff. Though broader equities have been performing well for most of the year, there are enough beaten-down stocks to choose from these days.
Let's discuss three of them: One that looks attractive is CVS Health (NYSE: CVS), and two that aren't worth investors' hard-earned money are Chegg (NYSE: CHGG) and fuboTV (NYSE: FUBO). Here's why.
The case for CVS Health
Healthcare giant CVS Health has faced various issues over the past two years. Here are two of the most important.
First, sales of COVID-19 diagnostic tests and other coronavirus-related products are down sharply. Second, its Medicare Advantage unit is experiencing more business than anticipated, leading to higher-than-expected costs. CVS Health's financial results have been mediocre (at best) recently, and even worse, the company has revised its guidance downward on multiple occasions. It did so again during the second quarter.
CVS Health now expects its adjusted earnings per share (EPS) for its fiscal 2024 to fall in the range of $6.40 to $6.65; its most recent projection was for an adjusted EPS of at least $7. CVS Health's revenue for the quarter increased by just 2.6% year over year to $91.2 billion.
Why should investors consider CVS' shares despite these issues? Note that, as serious as they are, these are short-term problems. CVS likely won't be dealing with the aftereffects of the pandemic on its financial results five years from now. At some point, that side of the business will stabilize. The same appears to be true when it comes to its Medicare Advantage unit.
Meanwhile, CVS Health has multiple paths to long-term growth and a solid competitive advantage. The company's business spans much of patients' care journey, from primary care to prescription drugs and insurance. And with long-term trends like the world's aging population, the demand for these services will increase. CVS Health benefits from a strong brand name as one of the top pharmacy chains in the U.S. -- it's a brand that patients trust.
Lastly, CVS Health is a solid dividend stock. The company may not be doing well right now, but purchasing its shares while they are down might look like a genius move in 10 years.
The case against Chegg
Chegg runs an online platform that offers various services that help students excel in school. Its subscription service features expert-level answers to homework and textbook problems across most disciplines. However, the company's business is at risk of becoming a bit of a dinosaur due to the advent of artificial intelligence (AI) chatbots like ChatGPT. After all, these nifty apps can answer questions, sometimes highly complex ones (GPT-4 did pass the bar exam), and write detailed essays in seconds.
Why pay for Chegg's subscription services when students can opt for ChatGPT, which can provide the same kind of help and much more? Chegg has also been dealing with the fact that, even without the threat from AI, its business is not nearly as popular as it was earlier in the pandemic. As a result, the company's financial results have been poor. In the second quarter, Chegg's revenue of $163.1 million decreased by 11% year over year. It ended the period with 4.4 million subscribers, down 9% year over year.
The company turned a net income of $24.6 million in the second quarter of 2023 into a net loss of $616.9 million.
Chegg is looking to make a comeback. The tech company is developing a platform that will leverage the genius of modern AI applications together with human subject matter experts. Chegg's new platform will also go beyond academic help in what the company calls "holistic support" to help students achieve their goals. Chegg is also decreasing costs by cutting 23% of its workforce.
Time will tell whether these initiatives will bear fruit, but the stock still looks far too risky for now. If Chegg proves it can succeed in this new AI-dominated environment, it may be worth considering the stock. Until then, investors should stay away.
The case against fuboTV
FuboTV is a leading streaming platform that specializes in sports entertainment. Although the brand is pretty famous, the streaming industry has become ruthlessly competitive. FuboTV is making progress on various fronts, though. In the second quarter, the company's revenue of $391 million increased by 25% year over year. Its North American subscribers grew by 24.2% year over year to 1.5 million. In the rest of the world, subscribers increased by 1.3% to 399,000. Overall, it wasn't a bad quarter for fuboTV.
What, then, is the problem with the company? Its business model has an issue as it spends far too much on acquiring the rights to show the content that it carries. The company's revenue -- most of which comes from subscriptions, with a small percentage derived from advertising -- doesn't even come close to covering the costs of these subscriptions enough to generate operating profits, let alone net profits. In the second quarter, fuboTV's subscriber-related expenses came in at $326.5 million, an increase of 20.5% year over year.
In fairness, the company's subscriber-related expenses have been growing slower than its top line. It reported an operating loss of $35.7 million in the period, better than the $52.5 million operating loss recorded in the prior year quarter. Its net loss per share of $0.08 was also much better than the loss per share of $0.17. Some might argue that with this kind of progress, fuboTV will eventually turn a profit.
But another issue with fuboTV is that some of its subscriptions are somewhat seasonal, with subscribers signing on just long enough to follow some leagues and then pausing their subscription during the off-season. FuboTV won't post these kinds of results every quarter. Considering that the stock still looks a ways off from turning a profit, it is hard to make a case for fuboTV over other streaming stocks that are performing very well.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends fuboTV. The Motley Fool recommends CVS Health and Chegg. The Motley Fool has a disclosure policy.
1 Beaten-Down Stock to Buy and 2 to Avoid was originally published by The Motley Fool