3 Lawsuit-Laden Stocks to Dump Before Problems Multiply

Stocks to sell

A pending or ongoing lawsuit isn’t always a reliable indicator of stocks to sell, but, in many cases, investors should take litigation as a sign to dig beneath the surface.

I’d first caution retail investors not to take pending litigation as a sure sign of failure or risk; tons of legal firms push frivolous lawsuits in a bid to maximize their own income. Even if the litigant’s motives aren’t nefarious, law firms bring suits against companies for other reasons beyond just a payout; for example, last year, a group of nuns sued Smith & Wesson (NASDAQ:SWBI) for “wrongdoing related to the marketing and sale of AR-15-style assault weapons.” Likewise, Elon Musk and Tesla (NASDAQ:TSLA) face near-constant lawsuits from minority shareholders — often with flimsy premises and thin evidence.

Still, these stocks to sell combine the worst of both worlds: They’re facing ongoing lawsuits, and in each of the three cases, the stock itself is a stinker.

GoodRx (GDRX)

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GoodRx (NASDAQ:GDRX) is facing a fresh lawsuit claiming the company misrepresented Kroger’s (NYSE:KR) total contributions to its revenue. Specifically, the suit claims that GoodRx didn’t inform investors that “Kroger accounted for less than 5% of the pharmacies accepting GoodRx discounts [but] was responsible for nearly 25% of GoodRx’s total prescription transactions revenue.” This misalignment exposes GoodRx to undue risk and, while management can run their operations as they choose, exposing shareholders to this level of systemic risk isn’t good business. In some ways, I’d call this a frivolous lawsuit — with merit, yes, but ultimately not enough to count it among the ranks of stocks to sell.

But this isn’t the only problem GoodRx faced in recent years.

More concerning to shareholders and customers alike is GoodRx’s 2023 $1.5 million civil penalty assessed by the Federal Trade Commission for “unauthorized disclosures of consumers’ personal health information to Meta (NASDAQ:META), Google (NASDAQ:GOOG, NASDAQ:GOOGL), and other companies.” Taken in conjunction with the most recent lawsuit, GoodRx seems to consistently pull the wool over shareholders’ eyes, Likewise, its past practice of actively “cash[ing] in on consumers’ extremely sensitive and personally identifiable health information” is a clear violation of consumer trust, ultimately making GoodRx too risky for most portfolios and a strong candidate among stocks to sell.

3M (MMM)

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3M (NYSE:MMM) constantly faces lawsuits, the most well-known of which is the “earplug lawsuit” that found the company liable and compelled to pay a $6 billion personal injury settlement to affected parties. Beyond the pure payout, 3M is facing a $370 million legal defense bill — ultimately operating a money pit that’s going to see shareholder value diverted toward legal costs rather than company growth, dividends, or buybacks.

That isn’t all, of course. 3M also owes $10 billion to residents affected by the company’s leeching “forever chemicals” in drinking water supplies. Payments toward this massive settlement begin next quarter and, as with the earplug suit, represent a company forced to focus on legal wrangling over operational expansion and dedicate capital toward payouts rather than benefiting shareholders.

Surprisingly, 3M remained largely unaffected by the suits this year as shares have climbed 10% since January. This is due, in part, to an uncertainty principle: ongoing lawsuits have uncertain outcomes and create unknown risks for investors, whereas settlements and adjudicated suits have clearly defined costs that are more easily modeled. Still, with a slew of lawsuits in the rearview but likely more ahead, 3M is certainly a top contender among stocks to sell.

GameStop (GME)

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GameStop (NYSE:GME) isn’t facing a lawsuit itself, but that doesn’t detract from its risk and status among stocks to sell. Last month, investors filed suit against meme stock mega-star Keith Gill, who was originally a face of the movement that propelled GameStop to its massive highs and has recently reemerged as a major player. The litigants dissolved the suit earlier this month. Still, bad news of this type surrounding GameStop doesn’t bode well for its future, particularly as the company itself remains on shaky ground with limited prospects beyond short-term meme stock status.

The company’s cashing in on its recent bounce with a massively dilutive share offering is just one of many examples of management taking advantage of their unique position in the market; their position is understandable — may as well make hay while the sun shines — but also shows a clear disregard for the legions of current and future bagholders propping up the stock.

I don’t even need to get into GameStop’s imminent operational concerns, which include job cuts amid slackening sales. If you made money on GameStop, congrats — but, if not, consider now the time to cut and run as GameStop sticks out like a sore thumb among stocks to sell.

On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.

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