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2 Risky Stocks to Avoid Right Now

Motley Fool - Fri May 12, 2023

While the stock market generally moves upward over the long term, some companies lag behind their peers. This underperformance can happen for several reasons, including unsustainable cash burn and weak balance sheets. Let's discuss why Carnival Corporation(NYSE: CCL)(NYSE: CUK) and Lucid Group(NASDAQ: LCID) could hurt your portfolio this week and beyond.

Carnival Corporation

Founded in 1972, Carnival helped popularize the vacation cruise industry in the United States and other countries. But while it has richly rewarded investors for decades, that all ended with the COVID-19 pandemic, which shut down operations and continues to haunt its balance sheet. The company is still far from bouncing back.

With first-quarter revenue of $4.4 billion (95% of 2019 levels) and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $382 million, it is tempting to assume Carnival is close to recovering from the impacts of the COVID-19 pandemic, but this is far from the case. With $32.7 billion in long-term debt, the company's biggest challenge is nowhere near resolution.

While the positive adjusted EBITDA looks great on paper, it doesn't even defray the $539 million paid out in interest expense that quarter alone, not to mention other outflows like debt principle pay-down or capital expenditures -- expected to total a whopping $3.2 billion in 2023 before jumping $4.1 billion in 2024. With Carnival burning through this much cash just to stay afloat, investors shouldn't expect the company to have much left over for shareholders.

Lucid Group

Analysts at Goldman Sachs expect electric cars to represent a whopping 61% of global car sales by 2040. This forecast suggests companies like Lucid could have a bright future if they survive that long. But with relentless cash burn and competition from better-capitalized rivals, the struggling car company faces a difficult road ahead.

The word sell in red lights repeated.

Image source: Getty Images.

First-quarter earnings highlight these challenges. While revenue more than doubled to $149 million, it fell below analysts' expectations of $210 million and actually represents a sequential decline compared to the previous quarter's revenue of $257 million. For Lucid, this boils down to weakening demand for its vehicles. And this trend likely results from competition as rivals like Tesla cut prices to capture market share.

Lucid is not well positioned to compete based on price because it isn't profitable. First-quarter operating losses ballooned almost 30% to $774.1 million. And the cash burn looks unlikely to reverse anytime soon because Lucid has a negative gross margin -- meaning it costs the company more to manufacture and distribute its cars than can be recouped by selling them, before even accounting for overhead costs.

With a price-to-sales multiple of 24, Lucid shares still trade at a substantial premium over the S&P 500 average of 2.4, which suggests the stock price still has plenty of room to fall.

Could the situation change?

While Carnival Corporation and Lucid are risky investments, they won't necessarily underperform forever if they manage to overcome their current challenges with debt and cash burn. That said, both stocks look poised to lose a lot of value in the foreseeable future, and it's probably too early for investors to bet on a turnaround.

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and Tesla. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

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