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3 lawsuit-ridden stocks to dump before problems multiply

While a pending or ongoing lawsuit isn’t always a reliable indicator of what’s worth selling, in many cases investors should treat litigation as a sign that something is worth taking a closer look at.

First, I would caution retail investors not to treat ongoing litigation as a sure sign of failure or risk; plenty of law firms file frivolous lawsuits to maximize their own profits. Even when the litigant’s motives are not nefarious, law firms file lawsuits against companies for reasons other than just paying damages; for example, last year a group of nuns sued Smith & Wesson (NASDAQ:SWBI) for “abuse in the marketing and sale of AR-15 assault weapons.” Similarly, Elon Musk and Tesla (NASDAQ:TSLA) constantly face lawsuits from minority shareholders — often based on flimsy premises and little evidence.

But the stocks being offered for sale combine the worst of both worlds: these companies face ongoing lawsuits, and in all three cases, the stocks themselves are bad.

GoodRx (GDRX)

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GoodRx (NASDAQ:GDRX) is facing a new lawsuit accusing the company of misleading Kroger’s (NYSE:KR) total contribution to revenue. Specifically, the lawsuit alleges that GoodRx failed to inform investors that “Kroger accounted for less than 5% of the pharmacies accepting GoodRx discounts (but) accounted for nearly 25% of GoodRx’s total prescription transaction revenue.” This mismatch exposes GoodRx to undue risk, and while management can conduct its operations as it sees fit, exposing shareholders to this level of systemic risk is not good business. In a sense, I would call this a frivolous lawsuit—with merit, yes, but ultimately not large enough to qualify as a stock to be sold.

But that’s not the only problem GoodRx has had to face in recent years.

More troubling for shareholders and customers is the $1.5 million civil penalty imposed on GoodRx in 2023 by the Federal Trade Commission for “unauthorized disclosure of consumer health information Finish (NASDAQ:FINISH), Google (NASDAQ:GOOGNASDAQ:GOOGLE), and other companies.” With the latest lawsuit, GoodRx seems to be constantly pulling the wool over the eyes of shareholders. Likewise, its previous practice of actively “exploiting consumers’ extremely sensitive and personally identifiable personal information” is a clear breach 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) is constantly facing lawsuits, the most famous of which is the “earplug lawsuit,” which found the company liable and forced it to pay $6 billion in personal injury damages to injured parties. In addition to the clean payout, 3M faces a $370 million defense bill — ultimately leading to a bottomless pit where shareholder value will be diverted to legal costs rather than business growth, dividends, or stock buybacks.

Of course, that’s not all. 3M also owes $10 billion to residents affected by the company’s leak of “forever chemicals” into drinking water supplies. Payments under the massive settlement will begin next quarter and, like the earplug lawsuit, means the company must focus on legal battles over operational expansion and allocate capital to payouts rather than to shareholders.

Surprisingly, 3M has remained largely untouched by lawsuits this year, as the stock is up 10% since January. This is partly due to the uncertainty principle: ongoing lawsuits have uncertain outcomes and pose unknown risks to investors, while settlements and resolved lawsuits have clearly defined costs that are easier to model. Still, with a slew of lawsuits behind it and likely more to come, 3M is certainly a prime candidate among stocks to sell.

GameStop (GME)

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GameStop (NYSE:GME) isn’t facing a lawsuit itself, but that doesn’t diminish its risky status as a hot stock. Last month, investors filed a lawsuit against meme stock megastar Keith Gill, who was originally the face of the movement that propelled GameStop to skyrocketing heights and has recently reemerged as a major player. The litigants settled the lawsuit earlier this month. Still, bad news like this about GameStop doesn’t bode well for its future, especially since the company itself remains on shaky ground with limited prospects beyond its short-term status as a meme stock.

The fact that the company capitalized on the recent rally with a highly dilutive share offering is just one of many examples of how management is exploiting its unique position in the market. Their position is understandable—strike while the iron is hot—but it also shows a clear disregard for the multitude of current and prospective shareholders who are keeping the stock price going.

I don’t even have to address GameStop’s looming operational woes, which include job cuts amid declining sales. If you made money on GameStop, congratulations — but if you didn’t, consider now to be the time to drop everything and run, because GameStop stands out like a sore thumb among the stocks to sell.

As of the date of publication, Jeremy Flint did not have any positions in the securities mentioned. The opinions expressed in this article are the author’s own, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication of this article, the editor in charge did not hold (directly or indirectly) any interests in the securities referred to in this article.

Jeremy Flint, an MBA and seasoned financial writer, specializes in content strategy for wealth managers and investment funds. He has a passion for simplifying complex market concepts, focusing 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.