Stay away from Wayfair’s ‘toxic’ stock

The stock of online furniture retailer Wayfair has grown “toxic,” and you should keep it out of your portfolio, CNBC’s Jim Cramer advised Monday.

“This has become a momentum stock without any momentum, which is why I think you need to stay the heck away from it,” the “Mad Money” host said. “As long as growth is out of style on the Wall Street fashion show, Wayfair’s stock, it’s going to be toxic.”

Wayfair has lost around 50% of its value since its highs in March, Cramer said, including a nearly 20% fall last Thursday after a disappointing earnings report.

Wayfair’s recent decline isn’t necessarily due to radically different fundamentals for the company, Cramer said. Rather, things have mostly stayed the same — precisely why “investors ran out of patience,” he said.

“For the last eight quarters, Wayfair’s reported better than expected sales, and with one exception, they’ve also delivered weaker than expected earnings,” Cramer said.

The only exception was in February, at which time better-than-expected earnings helped drive the stock higher, he said.

“Maybe investors thought Wayfair had finally figured out how to achieve something closer to profitable growth,” Cramer said, noting that in the subsequent weeks the stock hit its all-time high of $173.

It appears not yet. In fact, that growth has been slowing, Cramer pointed out.

Sales growth, after picking back up to 43% last year, has slowed in 2019 — 38%, 41% and 35% in the three quarters thus far.

The waning growth also has dovetailed with a 52% increase in operating expenses, Cramer said, with investment in improving its platform and in advertising spending.

Wayfair amassed $1.3 billion in sales in 2014, but grew that to almost $6.8 billion in 2018, Cramer noted. At the same time, he said, earnings per share went from negative $2.97 to negative $5.63.

“It feels like they’re spending more and more money to buy less and less growth,” said Cramer, who added external forces such as the the U.S.-China trade war hasn’t helped the Boston-based company either. “A bad combo.”

All of this has unfolded against the backdrop of shifting investor sentiment, away from growth stocks like Wayfair and toward “value stocks with proven earnings,” Cramer said.

RH is a company that has benefited from the trend, Cramer said, as the furniture maker previously known as Restoration Hardware has seen a nearly 70% rise since the spring.

Investors are “no longer willing to pay up for something like Wayfair with fast revenue growth, but no apparent path to profitability,” said Cramer, attributing this shift, in part, to the string of troublesome IPOs this year.

To clear the path to profitability, Wayfair would “need to do a wholesale reevaluation of their strategy, and I’m not sure they can pull that off,” Cramer said.

And as long as investors are prioritizing value of growth, Cramer said, “nobody’s willing to give Wayfair the benefit of the doubt anymore if they’re going to keep losing a lot of money.”