The S&P 500 (SPX) has risen 6% already this year. This is a tricky time to be an investor, as avoiding unattractive stocks is easier said than done when stocks representing every business sector seem to be heading higher with a renewed investor interest in risk assets. In the investment world, a brief recovery of stock prices amid a negative trend is known as a “dead cat bounce,” and these market events often end up hurting many investors’ portfolios.
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Given that it is difficult – if not impossible – to predict inflection points in the directional movement of stock prices, investors should try to avoid seemingly unattractive, overpriced stocks as these stocks end up falling the most. TAL Education Group (NYSE:TAL), Cintas Corporation (NASDAQ:CTAS), and Church & Dwight Co. (NYSE:CHD) are three unattractive stocks that are best avoided, in my opinion, amid uncertain macroeconomic conditions. I am bearish on the prospects for these three stocks.
TAL Education (NYSE:TAL) Group Faces Regulatory Headwinds
TAL Education stock has been on a tear in the last 12 months, rising by almost 150%, aided by better-than-expected earnings and expectations for easing regulatory tensions. In 2021, Chinese regulators banned for-profit after-school tutoring for private firms, sending TAL stock to record lows as the company’s revenue comprised mainly of fees collected by providing after-school tutoring services to K-9 students.
A rally in TAL stock was then triggered in 2022 amid speculation that China would reverse its decision along with a reversal of its crackdown on tech giants.
Since 2021, the company has made several strategic moves to spin off the K-9 after-school tutoring business while focusing on learning content development, technology development, and non-academic tutoring. These changes helped the company beat analyst estimates for revenue in the most recent quarter, but the reported revenue of $232.7 million was a staggering 77% decline on a year-over-year basis.
Regulators, so far, have not shown any signs of loosening their grip on the private tutoring industry despite Guo Shuqing, Communist Party Chief of the People’s Bank of China, reassuring investors earlier this month that the government will now shift its focus to achieving economic growth by supporting the private sector, including the beaten-down tech sector.
Is TAL Stock a Buy, According to Analysts?
Back in November, UBS analyst Felix Liu upgraded TAL Education to a Buy rating, citing profitability improvements. However, based on the ratings of three Wall Street analysts, the average TAL Education price target is $4.70, which implies downside potential of 35.35% — despite the stock coming in as a Moderate Buy.
Cintas Corporation (NASDAQ:CTAS) Faces Multiple Headwinds
Cintas is another company that outperformed the market handsomely in 2022, but this stellar performance has pushed the company into the overvalued territory today at a forward P/E ratio of 35x compared to the sector median of 17.4x. Cintas is one of the largest providers of corporate identity uniforms in the world, and the company serves more than one million clients in the United States, Canada, and Latin America. CTAS also provides facility services such as cleaning, disinfecting, and laundering.
Cintas is liked among dividend investors, which does not come as a surprise, given that the company has increased its dividend payout for 11 consecutive years, and Cintas has not failed to pay dividends in each of the last 39 years.
Although Cintas is arguably one of the best-managed companies in the U.S., investors need to be wary of rising energy costs as energy costs make up for a sizeable portion of its operating costs. The increasing odds of a recession also paint a gloomy outlook for the company as the fortunes of its uniform rental business are closely tied to the employment trends in Corporate America.
During a recession, job cuts are unavoidable, and these layoffs could impact the demand for uniform rental services in the coming quarters.
Is CTAS Stock a Buy, According to Analysts?
Based on the ratings of 10 Wall Street analysts, the average Cintas price target is $493.30, which implies upside potential of almost 10.5% from the current market price. This, however, does not leave a sufficient margin of safety to invest in a company that could come under pressure in the coming months.
Church & Dwight (NYSE:CHD) is Facing the Risk of Margin Compression
Church & Dwight has become a household name in the United States with its wide array of personal care and specialty products. The company has lost 20% of its market value in the last 12 months amid supply-chain constraints, the increasing likelihood of a recession, and rising commodity costs. Even on the back of a disappointing 2022, Church & Dwight is still valued at a forward P/E ratio of 27.4x compared to the sector median of 19.3x, which has a lot to do with its stellar market performance in the five years leading up to 2021.
To keep up with rising costs, the company has increased the prices of the majority of its products. However, with inflation already creating a dent in the wallets of many Americans, this strategy is unlikely to deliver the desired results in 2023. Investors should factor in the possibility of a notable deterioration of demand for the company’s products this year, which makes Church & Dwight stock a risky bet today.
Is CHD Stock a Buy, According to Analysts?
CHD stock has a Moderate Buy consensus rating based on the ratings of 11 analysts. The average Church & Dwight price target is $87.36, which implies upside potential of just over 7% from the current market price.
The Takeaway
With stocks making a strong comeback in 2023, many investors are looking to rebalance their portfolios by gaining more exposure to undervalued stocks. At the same time, it is important to reduce the exposure to seemingly unattractive, overvalued stocks that could perform poorly this year. TAL Education Group, Cintas Corporation, and Church & Dwight are three companies that could disappoint investors in 2023.
