Do you catch a falling knife?

We all know the market term ‘don’t catch a falling knife’. And in the current market conditions why would you? But with indices, the likes of the magnificent 7, industrials and banks doing so well in 2024 people are asking where’s the value?

And that is why people chase falling knives, because they perceive this value. They perceive that if others are doing so well these beaten up companies should surely catch up and therefore give them a big windfall. So we wanted to go through some of the 20 big stocks in the US that are down 20 plus percent or more in 2024. You will know the majority of these names they show up in everyday life and across all sectors and industries.

The interesting thing about them is that they are very diverse across pharmacies, industrials, streaming firms, financial firms and more and that’s why there is a huge caveat to this list. Because the majority of these 20 plus losers have structural reasons as to why they have lost 20 plus percent.

Let’s really have a look at some of those that are probably an interesting opportunity, take Nike for example. NIKE is down to 30.4% year to date and 41.1% from its 52-week high. Compare that to its main European competitor in Adidas up 23.7% year to date and only 9% off its 52-week high

Year to date performance of NKE to ADS

So should you catch the Nike falling knife? Well first and foremost the issues hitting NIKE have been some external issues, but mainly internal ones. Sponsorship deals with Olympic teams have been higher than expected and have hit cost, while on the revenue sign uptake of Olympic branded apparel is below historical Olympic standard. 

Then there is the deal with the German National Football team, something now he thought was a coup having booted Adidas off what has been nearly a 6-decade partnership. However this turned out to be something much less profitable than Nike thought explains its current conundrum and share price poor performance. The answer to the falling knife question with NIKE will probably be answered over the next three weeks as the Paris Olympics take off and apparel numbers come in. 

Therefore it is possible that now he could recuperate some of the losses had seen on its share price pretty rapidly but again we always caution catching a falling knife but it is one to watch.

Which brings me to the next falling off to really have a good look at paramount global. The content and streaming giant has had a really tough time in 2024. Down 23% year to date and 34.2% from its 52 week high the streaming giant is facing cost blowouts, content competition and legacy issues to its cable and freeway TV programming. There’s always been a discussion that the streaming wars would come to a head sometime early after COVID-19. With over 30 different streaming providers competition is so high and costs ballooning that sooner or later a consolidation will come. The question is will paramount the first major player to fall in what probably will be a house of cards scenario? 

Let’s have a look and compare it to some major players like Disney and Netflix. As this chart shows both Netflix and Disney are still up in 2024 how Disney has had some structural issues around its amusement parks Netflix on the other hand is on a tear.

This chart clearly shows paramount’s biggest problem. It’s not the biggest provider like it Once Upon a time was, it is coming up against really stiff competition in Netflix and outside of cable it doesn’t really have a diversified revenue stream like Disney. 

What’s more it’s facing real legacy issues with its free to air and TV services in general. Whenever you see a firm ‘slimming to greatness’ by cutting costs and slashing services it is an immediate red flag and normally suggest that this further to fall before the knife actually finally hits the floor. 

Paramount will still be Paramount it will still produce content people want to see but in the current environment and the competition it faces you will not be the Paramount of yesteryear.

Finally let’s have a look at some of the other major names that sit on this list: 

Lululemon Athletica is down 44.6% year to date and 45.3% from its 52-week high. Like all things in consumer discretionary apparel is one of the key areas facing the biggest headwinds and lululemon is not immune. 

Online e-commerce player Etsy is also facing similar problems down 23.7% year to date and 39% from its 52-week high. Etsy is a small item provider with high turnover which means volume is the key. In a world where people are battling the cost-of-living, small items are easy to go by the wayside.

Finally we come to Walgreens Boots Alliance – the worst performing big cap player on the S&P 500. Down a whopping 57.4% year to date and 64.8% from its 52-week high WBA is in freefall. 

We need to go through why Walgreen Boots is getting absolutely towelled up. First and foremost, you need to understand the shift in the US around health care services. Players like Walmart, Kroger and CVS have all expanded their health care services from in store and beyond. Walgreens certainly reacted to this shift and spent heavily in this area spending $8.9 billion to acquire Summit-Healthcare City to compete. But the plan eventually failed and saw then CEO Roz Brewer fall on her sword. New CEO Tim Wentworth ‘s basically unwinding the health service position by trying to wind down the company’s investment in Village MD and divesting parts of the Summit-Healthcare City acquisition. But again like Paramount – slimming to greatness is not a strategy that has really worked longer term. 

So what is Walgreens Boots Alliance going forward? If it’s not trying to take on main competitors in healthcare services WBA is basically saying it’s a retailer that just happens to be selling healthcare products. 

In Australia that certainly works for a player like Chemist Warehouse but in the US competition is much higher and thus margins smaller and overall revenue growth in the sector is anaemic 2% per annum.

This explains the share price fall that we’ve seen in WBA but the final humiliation came in the last month. WBA has now dropped below a market cap of US$10 billion and that means it can no longer be included in the NASDAQ 100. 

Being sold out of index funds has only ramped up further selling in this once large firm.

This normally signals the final shake out of a share price and the falling knife that is WBA is clearly coming towards the bottom, a bounce is probable. But with its current strategy it is unlikely to recuperate historic highs anytime soon.