It is that time of year when the ghosts and ghouls come out, and the last thing you want as an investor is to have any tricks played on you.
Of course, stocks will always be prone to periods of short-term volatility, but you want to avoid those with longer-term negative trends. Here are two you probably should steer clear of right now as we approach Halloween.
1 . Moelis & Co.
It has been a brutal time for investment banks, and Moelis & Co. (NYSE:MC) has felt it as much as anyone. Through the first half of the year, the company’s revenue was down 32% to $368 million, while it had a net loss of $9.7 million through June 30, down from $117 million in net income through the first six months of 2022. The firm is due to report its third-quarter earnings this week, but I don’t expect much change in their fortunes, as Dealogic reported that investment-banking revenue dropped 16% overall in the third quarter.
While some of the larger investment banks have asset management, trading or wealth management to fall back on during this dry spell, Moelis is a boutique, pure-play investment bank, so it will be more volatile. What really clouds the outlook for Moelis is the high level of uncertainty in the market for mergers and acquisitions and the capital markets.
Some analysts believe these problems have finally hit bottom and that conditions should improve in 2024. However, others are more uncertain, given the fact that interest rates are still high and will likely stay high for a while. Additionally, there is still a chance that the economy could enter a recession next year.
While Moelis’ stock is actually up about 5% this year, it is way overvalued with a price-to-earnings (P/E) ratio of almost 76. The consensus price target is $39 per share in the next 12 months, which would represent a 4% decrease from its current price. Until rates start coming down and profits start going up, it is best to avoid this stock.
2. Marcus & Millichap
Marcus & Millichap (NYSE:MMI) is another stock that has been hampered by a struggling industry. The firm is a commercial real estate investment broker, and that market has also been hammered due to several factors, including high interest rates, which have sent sales plummeting, work-from-home trends, which have left office buildings vacant, and a downturn in in-person retail shopping as more people buy online, among other issues.
As a result of these trends, Marcus & Millichap has stumbled in recent years. The stock is down 17% year to date after falling nearly 32% in 2022.
Through the first six months of the year, the firm’s revenue fell 56% from the same period the year prior, with brokerage commissions down 57% and private client brokerage revenue off 50% year over year. Marcus & Millichap recorded a net loss of $15 million, or 37 cents per common share, through the first two quarters, compared to net income of $75 million, or $1.85 per common share, over the same period in 2022.
The firm is set to report its third-quarter earnings this week, but there is little hope that things will get better in the commercial real estate space any time soon. Analysts say the worst is not yet over for the market as it may not hit bottom until later in 2024 or 2025.
Additionally, Marcus & Millichap has a P/E ratio of 76, so it is overvalued based on its earnings, and the near-term outlook isn’t looking much brighter. The stock has a median price target of $20 per share, which would be another 30% drop from its current price. The commercial real estate market will eventually turn, but not any time soon, so this stock is one to avoid for now.
