We’ve turned the page for 2020, but that doesn’t mean we left last year’s volatility at our doorstep. In any case, Wall Street and investors are well aware of the uncertainty that continues to plague the US economy and stocks in recent weeks.
This historical volatility was evident in the so-called YOLO – you only live once – stocks or “Reddit raid” companies. We’ve now seen retail investors in community chat rooms conspire to manipulate seemingly heavily short-selling stocks to create an explosive short squeeze.
Suffice to say, these are crazy times, and investors are witnessing some truly historic (and probably unsustainable) returns.
As we move on to February, five ultra-popular stocks stand out as companies investors could wisely avoid like the plague.
Image Source: Getty Images.
GameStop
A common theme this month is: keeping your distance from strongly short-selling stocks that are disconnected from their underlying fundamentals. The poster child of this is a multi-channel video game and accessories store GameStop (NYSE: GME). Even with certain brokers (ahem, Robinhood) restricting trading in GameStop, it still managed to close the month of January higher at a cool 1,625%. That is not a typo.
GameStop was the top-selling stock in January, making it the top target of retail investors in the r / WallStreetBets chat room on Reddit. The problem is, the pessimism surrounding GameStop appears to be well-grounded, especially as the company doubled in value several times last month.
GameStop has been forced to keep closing some of its physical locations to reduce costs. The company has been profitable for a long time, but has recently suffered three consecutive years of losses as the gaming ecosystem moves online. While the company is slowly adapting – e-commerce sales more than quadrupled during the holiday season of 2020 from the same period last year – it’s unclear if that will be enough to push the company back into the black.
Investors don’t have to worry about the long-term survival of a company that’s worth $ 23 billion and has gained more than 1,600% in a month. That’s why GameStop should be avoided like the plague.
Image Source: Getty Images.
AMC Entertainment
Another core file of YOLO to avoid at all costs in February is the cinema operator AMC Entertainment (NYSE: AMC).
AMC, one of the most short-selling stocks in the market, gained 278% last week. While the company brought in $ 917 million in funding from a combination of debt and stock offerings, most of the stock price increase seems to be linked to Reddit-based trading rather than anything tangible.
There are three reasons why these astronomical gains at AMC are so disgraceful. For one thing, a little over a week ago, AMC narrowly averted bankruptcy but somehow ended last week with a market cap of $ 4.5 billion. Companies that manage to stave off bankruptcy with an 11-hour cash injection are typically not worth $ 4.5 billion.
Second, we don’t know when cinema traffic will return to pre-pandemic levels. Restrictions in the supply of vaccines and new variants of the virus can make a return to normal difficult. In addition, the ability to access new content online could completely destroy the traditional cinema model.
Third and finally, AMC is working on the idea of selling even more shares from Friday evening, January 29. That’s a nice way of saying that extra dilution is on the way to investors.
Image Source: Getty Images.
Koss Corp.
Yet another Reddit darling to avoid like the plague is small cap Koss (NASDAQ: KOSS). Over the past 40 years, this manufacturer of headphones, Bluetooth speakers and various communication headsets has never increased its inventory above $ 15. Last week it hit $ 174 in premarket trading after closing at $ 3 and changed only a few days earlier.
While Koss’s second-quarter operating results released last week were not bad, they in no way confirmed the 1,817% profit the company posted over a five-day period. Revenues during the first six months of fiscal year 2021 are up a modest 6% to $ 10.1 million, with net income of $ 0.09 per share. If we randomly extrapolate these numbers for the full 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 year.
Koss’ high short-term interest rate and low float have made it a popular target for retail investors. But nothing about the existing valuation makes sense.
Image Source: Getty Images.
Sundial growers
Marijuana stock Sundial growers (NASDAQ: SNDL) is another very popular name to add to the avoidance list after a 72% run-up in January.
There is no doubt that cannabis is a particularly hot investment right now. The Democratic Party’s control of the White House and Congress has revived the discussion about the US legalization of cannabis at the federal level. This has spiced up the step of all Canadian pot stocks.
Sundial Growers, however, is not like most Canadian cannabis companies. While all licensed Canadian producers have issued shares at one time or another to finance a takeover or to cover day-to-day expenses, Sundial’s dilution has taken hold of investors like a tsunami. To improve its financial position, the company sold shares of its stock and converted some of its debts into equity. In fact, on Friday, January 29, the company announced a $ 100 million registered direct offering of shares and warrants. In my more than two decades of investing, I have seen few instances where the number of shares in a company has increased so rapidly.
Additionally, Sundial Growers may need to do a reverse split to avoid delisting, and it continues to lose quite a bit of money as it moves from the wholesale cannabis to a higher margin retail model. It is one of the worst pot stocks investors can buy.
Image Source: American Airlines.
American Airlines group
And last but not least, American Airlines group (NASDAQ: AAL) is a stock to stay clear of in February, and probably well beyond.
Unlike the other airlines on this list, American Airlines posted a modest profit of just 9% in January. While the presumed low stock price after the coronavirus pandemic has some investors (and many Robinhood millennials) betting on a recovery in the coming months and years, I consider American Airlines the absolute worst airline stock.
The company is currently lugging around north of $ 41 billion in total debt and about $ 33 billion in net debt. Even with access to coronavirus support funding, the company’s financial flexibility has been jeopardized by the debt burden. Paying off its existing debt will hold back most of its growth initiatives for years to come.
Additionally, American Airlines is no longer paying dividends or buying back shares as a result of accepting coronavirus funds. Its capital repayment program was perhaps the only good thing American Airlines chose for it.
The aviation industry is capital intensive, has a low margin and is dependent on economic expansion, which is far from certain at this point. That makes American Airlines completely avoidable.