Is It Time to Buy the S&P 500's 4 Worst-Performing Stocks?

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It’s almost six months into 2022 and the stock market is still struggling to recuperate. The S&P 500 index is down almost 14% year-to-date, and though it has bounced off the lows it hit just a few weeks ago, a souring economy threatens to send the index lower.

Inflation is at 40-year highs, gas prices are at record levels and rising, interest rates are climbing, the housing market is weakening, and consumer confidence is slipping amid concerns about a recession.

Image source: Getty Images.

Yet even if the stock market plunges, investors should understand that corrections, crashes, and bear markets are all part of the investing cycle. Over time, they are always followed by bull markets that make the previous drops seem like small blips on the screen.

It’s often a great time to go shopping for stocks during market corrections because previously overpriced names are now affordable once more. The four worst-performing stocks on the S&P 500 are down by an average of 61% this year, but just because they’re cheaper than they were doesn’t make them obvious buys. Let’s see whether now is a good time to pick up these four former growth stocks.

Imge source: PayPal.

PayPal (down 56.3% year-to-date)

Payments processor PayPal (PYPL -2.03%) is having a rough go of it, to say the least, with shares down 67% over the last 12 months and off 71% from their 52-week high. The reason for the sharp decline is that the easy money is gone. All those stimulus checks the government handed out last year that helped ignite the current round of inflation have since dried up, and consumer spending is being reined in.

It seems all but the deep discount retailers are suffering from the same ill effects of the artificial spending boom the stimulus checks generated. As the national mood worsens, consumers are pinching pennies. PayPal reported payment volume increased 13% last quarter, well below the 20% or more increases it’s consistently reported for years, and it is forecasting full-year revenue growth of just 11% to 13%.

It does own the leading peer-to-peer payment app Venmo, but bank-backed Zelle is growing faster and may eventually become the dominant player because of the platform trust the banks provide, according to eMarketer.

Although PayPal partnered with (AMZN -2.52%) to allow Venmo to be used on the e-commerce giant’s site, the retail giant recently launched Buy with Prime which will allow Amazon Prime members to use their benefits on third-party websites.

While PayPal’s stock is cheap compared to where it previously traded, it might not have fallen enough to justify buying it yet.

Image source: Getty Images.

Align Technology (down 59.7%)

While the general skittishness of consumers and lack of financial resources are hurting Align Technology (ALGN -3.96%) the same way as they are PayPal, the dental alignment products maker is a global company (half its revenue comes from international markets), and it is also bearing the impact of China’s zero-COVID policies.

China is Align’s second-biggest market, and in a bid to keep a lid on new coronavirus outbreaks, cities such as Beijing and Shanghai have been kept under draconian lockdown orders, with people not allowed to leave their homes and no deliveries — not even for food — permitted. 

Yet officials are signaling an easing of restrictions, and though economic difficulties could slow uptake of the clear aligners, Align estimates there’s a target market of a half-billion customers globally. It has fewer than 13 million today, giving it a large runway for growth still.

However, President Biden just warned that there’s no end in sight yet for higher food prices or the record gas prices we’re facing, and Align’s products are a discretionary consumer product — a procedure that can easily be postponed until a time when money isn’t so tight. The sequential decline in quarterly revenue that the dental products maker recently reported may not be the last. It may be a while before Align Technology can start growing again.

Image source: Getty Images.

Etsy (down 63%)

Online handmade and vintage goods retailer Etsy (ETSY -7.23%) came into its own during the early days of the pandemic when people were scrambling for masks of any sort in an attempt to ward off the coronavirus. Searches for masks on the site reached 9,000 a second at the time, according to CEO Josh Silverman, causing the stock to triple in value. 

While Etsy went on to almost double again in value last year, its shares have been in a rapid and steady decline in 2022 as worries about increased offline shopping and the harmful effects of inflation on consumers have sent investors scurrying. 

Revenue was up in the most recent quarter, and Etsy’s marketplace sales actually grew 2% from last year. Growth was primarily coming from its recent acquisitions of Depop and Elo7, but because they’re both unprofitable ventures, they’re hurting the bottom line and margins. Net income tumbled 40% from last year. But the company is seeing some good traction from the ad business it began last year, which should be promising for the future.

With Etsy itself expecting continued headwinds from macroeconomic and geopolitical events for at least the rest of the year, the online retailer may find itself struggling for some time to come. A good case can be made that excellent long-term growth potential remains for Etsy, but there may be cheaper prices coming in the months and quarters ahead.

Image source: Getty Images.

Netflix (down 68%)

The worst-performing stock in the S&P 500 is movie streamer Netflix (NFLX -2.98%), which caught the market off guard when it reported a drop of 200,000 subscribers, its first decline since 2011. Considering it had forecast it would add as many as 4 million subscribers, it was a massive hit to the company — and the stock. Worse, it believes it will lose as many as 2 million subscribers in the current quarter too.

Netflix raised prices on its subscription plan, which didn’t help when consumers were facing rising costs everywhere — which was exacerbated by Netflix’ content problem, meaning many people just aren’t finding all that much of interest to watch on the platform.

As competing services from movie studios have chosen to keep their films to themselves, Netflix has had to rely more upon original programming to fill the gap, and its decision to opt for quantity over quality has been revealed as a mistake. It’s course-correcting now, dropping shows for niche audiences and looking more toward content with a broad-based appeal, but it may have damaged itself in the process. 

Nielsen data, however, shows Netflix is still the leading service in terms of the number of hours of audience view time, and with over 221 million subscribers worldwide, it remains the biggest streaming channel. It’s still an essential service for entertainment, and after its stock was cut off at the knees — it’s down over 72% from recent highs — it ought to be a good long-term stock to buy for your portfolio.