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2 Stocks I Wouldn't Touch With a 10-Foot Pole and What to Buy Instead

Motley Fool - Fri Jun 9, 4:29AM CDT

Investing is not a one-way street. Picking the right stocks is important, of course, but you also need to avoid burning cash in bad ones.

Unfortunately, some inferior ideas can look promising or even downright tempting for a while. So I'm here to remind you that not every low-priced stock is a turnaround story in the making and there are often better opportunities available.

Below, I'll show you a couple of stocks that I wouldn't recommend to anybody today, paired with a couple of peers that actually look like solid long-term investments. Let's start in the retail sector.

Why I'd buy Amazon but not Kohl's

Department stores with massive store networks used to look immortal. Malls and shopping centers were built around these pillars of the trade offering one-stop-shopping convenience at affordable prices, all wrapped in glitzy store designs. The foot traffic to these cornerstones drove the business of smaller, more specialized retailers in the same mall.

Well, things have changed. Department-store giants like Sears and JC Penney ran into an e-commerce brick wall in the 2010s; then the coronavirus pandemic landed another crushing blow to struggling retailers. The tally of bankrupt department-store chains in recent years is long and growing, and I'm afraid Kohl's(NYSE: KSS) may be the next name to join that list.

The Wisconsin-based retailer is the largest remaining name in the game. Kohl's operates more than 1,100 stores in 2023, far ahead of roughly 800 locations for Macy's. It's also the only publicly traded American department store to report negative earnings over the last four quarters, and its revenue is falling fast.

The downtrend started several years before COVID-19, mind you. While many other companies are striving for business as usual these days, Kohl's has returned to the pre-pandemic downtrend and failed to ignite a turnaround. Its sales and earnings were plunging long before COVID-19 came along:

KSS Revenue (TTM) Chart

KSS Revenue (TTM) data by YCharts.

I do find myself at a local Kohl's store every now and then. Ironically, that's only because it handles returning goods I bought from Amazon(NASDAQ: AMZN). And of course, I would pick Amazon's stock over Kohl's in a heartbeat.

The return-shipment partnership notwithstanding, Amazon's success is a key contributor to the misery at Kohl's. The online retail giant is still growing sales at a compound average growth rate (CAGR) of 23.6% over the last five years and keeps finding new ways to expand its business even further. From streaming media services and cloud computing to a largely untapped global growth opportunity, many signs point to continued long-term strength.

If you're looking for a retailer that's ready to take advantage of pent-up demand when the inflation crisis finally fades out, I would advise you to pass by Kohl's and its uninspiring turnaround effort. Amazon's unstoppable growth story is still just getting started.

Why Fiverr is a buy but Upwork isn't

Let's go for a quick stroll through the gig economy.

Millions of people are supplementing their 9-to-5 paychecks with freelance or contractor work these days. Some are even replacing their entire day jobs with contract gigs. Thirty-six percent of American workers performed some freelance work in 2021, according to a report from freelancing platform provider Upwork(NASDAQ: UPWK).

Freelancers love the flexibility of a self-made work schedule, and those who have tried a full-time gig economy approach are unlikely to go back. As a result of this growing trend, both consumers and businesses are getting more comfortable with outsourcing certain tasks to freelancers. A Statista analysis suggests that 51% of the U.S. workforce will fall under the freelancing banner as soon as 2027.

The business opportunity of the gig economy is large, growing, and deeply inspiring. This market has room for plenty of long-term winners. For example, fellow freelancer marketplace operator Fiverr International(NYSE: FVRR) is poised to make the most of the ongoing sea change.

Many investors wrote Fiverr off as a short-lived coronavirus play, arguing that the business would fade as soon as the 2020 lockdowns ended. That didn't happen.

Fiverr's freelancers just kept coming back for more gigs. The company's 2022 sales rose 78% above the same figure from 2020, while free cash flow more than doubled.

Meanwhile, the company keeps launching new services, such as the Fiverr Enterprise platform. Fiverr boasts 4.3 million active service buyers, far ahead of chief-rival Upwork's 827,000 active clients. And the company achieved this client growth while also charging a 30% take rate -- the percentage of fees, compared to the total value of services performed. By comparison, Upwork's take rate has never been higher than 16%.

As you can see, Fiverr is a much stronger business than Upwork in many ways. Fiverr's revenue line is rising much faster than Upwork's, and only one of these companies generates positive cash profits:

FVRR Revenue (TTM) Chart

FVRR Revenue (TTM) data by YCharts.

Remember, investing isn't just about finding the cheapest stock -- it's about finding the stock with the best value proposition, taking into account the company's prospects for sustainable growth and profitability.

Fiverr and Amazon offer these qualities in spades. That's why I'm a happy shareholder of both. Upwork and Kohl's can't make the same claims, so I don't recommend buying their stocks today.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in and Fiverr International. The Motley Fool has positions in and recommends and Fiverr International. The Motley Fool recommends Upwork. The Motley Fool has a disclosure policy.

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