We turned the page on 2020, but that doesn’t mean we left last year’s volatility at the door. In fact, Wall Street and investors are well aware of the uncertainty that still plagues the US economy and equities in recent weeks.
This historical volatility became immediately apparent in so-called YOLO shares – you only live once – or “Reddit-raid” companies. For more than a week, we’ve seen retail investors in community chat rooms come together to apparently manipulate heavily shorted stocks to create an explosive short tightening.
Suffice to say that these are crazy times and investors are witnessing truly historic (and probably unsustainable) returns.
As we move through February, five ultra-popular stocks stand out as companies that investors should avoid like the plague.
Image source: Getty Images.
GameStop
A common theme this month will be to keep away from heavily shorted stocks that have disengaged from their underlying fundamentals. The poster boy for this is the multi-channel video game and accessory retailer GameStop (NYSE: GME). Even with certain brokers (ahem, Robinhood) restricting trading on GameStop, he still managed to end January with a 1.625% increase. This is not a typo.
GameStop was the best-selling stock in January, becoming the main target of retail investors in Reddit’s r / WallStreetBets chat room. The problem is that the pessimism surrounding GameStop seems well-founded, especially with the company doubling in value several times in the past month.
GameStop was forced to continue to close some of its brick and mortar locations to reduce its costs. The company has been profitable for a long time, but recently produced three consecutive years of losses as the gaming ecosystem moves online. While the company is adapting slowly – e-commerce sales during the 2020 holiday season more than quadrupled over the previous year – it is unclear whether that will be enough to push the company back into the blue.
Investors should not be concerned with the long-term survival of a $ 23 billion company that earned more than 1,600% in one month. That’s why GameStop should be avoided like the plague.
Image source: Getty Images.
AMC Entertainment
Another central YOLO stock that should be avoided at all costs in February is the cinema operator AMC Entertainment (NYSE: AMC).
One of the best-selling stocks on the market, AMC gained 278% last week. Although the company has secured $ 917 million in funding for a combination of debt and equity offerings, most of the share price gains appear to be linked to Reddit-based business activity, rather than anything tangible.
There are three reasons why these astronomical gains at AMC are so notorious. First, AMC narrowly avoided bankruptcy just over a week ago, but somehow ended last week with a market capitalization of $ 4.5 billion. Companies that manage to avoid bankruptcy with an 11th hour cash injection are usually not worth $ 4.5 billion.
Second, we do not know when cinema traffic will return to pre-pandemic levels. Restrictions on the supply of vaccines and new variants of the virus can make it difficult to return to normal. In addition, the ability to access new content online can completely destroy the traditional model of cinema.
Third and last, AMC is considering selling even more shares on the night of Friday, January 29. This is a sophisticated way of saying that further dilution is on the way to investors.
Image source: Getty Images.
Koss Corp.
Another reddit darling that should be avoided like the plague is the small-caps Koss (NASDAQ: KOSS). In the past 40 years, this manufacturer of headsets, Bluetooth speakers and several communication headsets has never had a stock of more than $ 15. Last week, it reached $ 174 in the pre-market after closing at $ 3. and change a few days before.
While Koss’ second-quarter operating results released last week were not bad, they in no way validated the company’s 1,817% gain over a five-day period. Sales in the first six months of fiscal 2021 increased by a modest 6%, to $ 10.1 million, with net earnings of $ 0.09 per share. If we arbitrarily extrapolate these figures for the entire fiscal year, Koss, which runs a highly cyclical and commoditized business, is valued at more than 27 times sales and 356 times net income for the entire year.
Koss’ high short interest and low float have made him a popular target for retail investors. But nothing about his existing assessment makes sense.
Image source: Getty Images.
Sundial Growers
Marijuana stock Sundial Growers (NASDAQ: SNDL) is another ultra-popular name to be added to the list of avoided items after a 72% increase in January.
There is no doubt that cannabis is an especially interesting investment now. Democratic Party control over the White House and Congress has rekindled the discussion about the possible legalization of cannabis by the United States at the federal level. This gave vitality to all Canadian marijuana stocks.
However, Sundial Growers is not like most Canadian cannabis companies. While all licensed Canadian producers issued shares at one point or another to finance an acquisition or cover day-to-day expenses, Sundial’s dilution hit investors like a tsunami. To improve its financial position, the company sold shares and converted part of its debt into equity. In fact, on Friday, January 29, the company announced a registered direct offering of $ 100 million in shares and guarantees. In my more than two decades of investment, I have seen few cases where the number of shares in a company has increased so rapidly.
In addition, Sundial Growers may need to enact a reverse split to avoid closing the exchange, and continues to lose a lot of money as it transitions wholesale cannabis sales to a higher-margin retail operating model. It is one of the worst stocks that investors can buy.
Image source: American Airlines.
American Airlines Group
Last but not least, American Airlines Group (NASDAQ: AAL) it is a stock to avoid in February, and probably much later.
Unlike the other companies on this list, American Airlines had a modest gain in January of just 9%. Although its stock price is perceived to be low after the coronavirus pandemic has some investors (and many Robinhood millennials) betting on a recovery in the months and years to come, I consider American Airlines the absolute worst airline stock.
The company is currently carrying around $ 41 billion in total debt and about $ 33 billion in net debt. Even with access to coronavirus relief financing, the company’s financial flexibility has been compromised by its debt burden. Servicing your existing debt will restrict most of your growth initiatives for years.
In addition, American Airlines is no longer paying dividends or repurchasing shares as a result of accepting coronavirus aid funds. Its capital return program was perhaps the only good thing that American Airlines had in its favor.
The civil aviation sector is capital intensive, with low margins and depends on economic expansion, which is far from certain at the moment. This makes American Airlines completely avoidable.