Should Investors Consider Buying the S&P 500’s Weakest Stocks in March? | The Motley Fool

Should Investors Consider Buying the S&P 500’s Weakest Stocks in March? | The Motley Fool

March was another winning month for the S&P 500 (^GSPC 0.11%). The broad-market index gained 3.1%, beating the Dow Jones Industrial Average and the Nasdaq Composite. The S&P 500 posted its best first-quarter gain since 2019. It’s up 10.1% this year and its new bull market finally became official in January.

However, not every S&P stock was a winner last month. Let’s take a look at the three worst-performing S&P 500 stocks in March to see if any are worth buying on the dip.

Image source: Getty Images.

1. Lululemon Athletica (down 16.3%)

March was a rough month for footwear and apparel retail stocks, as Lululemon Athletica (LULU 0.31%), Nike, On Holding, and Foot Locker all fell on their earnings reports. Luluemon was in fact the worst performer of the month on the S&P 500, as the stock fell 15.8% on March 22 after it reported fourth-quarter earnings.

Lululemon delivered another solid quarter of growth with revenue up 16% year over year to $3.21 billion, ahead of expectations, and adjusted earnings per share rose 20% to $5.29, which also beat estimates.

However, Lululemon is a high-priced stock, and those tend to fall on the slightest hint of a problem. While the fourth-quarter results were strong, guidance for 2024 disappointed. The company forecasted revenue growth slowing to 10%-11% year over year to $10.7 billion-$10.8 billion, adjusted for the extra week in the calendar, which missed estimates at $10.9 billion. It expects earnings per share of $14.00-14.20, up 16% year over year at the midpoint.

Lululemon’s sell-off seems to be more about valuation rather than a fundamental problem with the business. The business is still performing well, and guidance is not actual results, so investors should be hesitant about overreacting to it. The stock is worth buying on the dip.

2. Southwest Airlines (down 14.9%)

A weak earnings report wasn’t the culprit in Southwest Airlines’ (LUV -0.27%) slide last month. Instead, the sell-off in Southwest came as the company cut its guidance in response to the quality control crisis at Boeing.

Southwest cut its revenue per available seat mile (RASM) from a 2.5%-4.5% increase to flat to 2%. It also raised its cost guidance slightly for both operations and fuel.

Boeing reduced its expected aircraft deliveries to Southwest from 79 to 46, which is likely to impact growth over the rest of the year.

The crisis at Boeing has introduced a high level of uncertainty into the airline industry and Southwest. Considering that, investors are better off waiting for more clarity until they invest in the stock.

3. Zoetis (down 14.7%)

Pet pharmaceuticals leader Zoetis (ZTS 0.41%) also struggled last month, though, unlike Southwest and Lululemon, it didn’t fall on a specific event.

Instead, Zoetis seemed to slip on broader weakness in the pet industry as a number of pet stocks were down last month.

Zoetis disappointed in its fourth-quarter earnings report in February as the company missed estimates on the bottom line and offered weak guidance for 2024, showing that it expects the post-pandemic headwinds in the pet industry to persist.

Among the challenges weighing on the stock is a European antitrust investigation into whether Zoetis prevented the launch of a rival pain medicine for dogs. The news puts Zoetis at risk of a sizable fine.

Even after the sell-off, Zoetis shares look expensive at a price-to-earnings ratio of more than 30. While the company is the leader in its pet pharmaceuticals niche and has a strong track record, investors would be better off waiting for signs that the pet industry is recovering from the post-pandemic slowdown before buying the stock.

Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Lululemon Athletica, Nike, and Zoetis. The Motley Fool recommends Foot Locker, On Holding, and Southwest Airlines and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

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