The next round of stimulus controls will likely trigger another wave of private investor participation, and investors backing the right companies could turn a check for $ 1,400 into a much larger amount. Of course, doing this requires taking some risk, and it’s fair to say that the stock market looks volatile.
With that in mind, we asked three Motley Fool contributors to create a profile of a hot, high-flying stock that they think investors should stay away from now. Read on to see why they think support is GameStop (NYSE: GME) Tesla (NASDAQ: TSLA), and Sundial growers (NASDAQ: SNDL) with your incentive money, money would be a bad move.
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Don’t try to recapture the magic
Keith Noonan (GameStop): Last year’s comeback rally for GameStop was nothing short of incredible. The otherwise struggling retailer’s stock began to soar after excitement over new video game consoles from Sony and MicrosoftIt got another boost with news that Ryan Cohen, founder of the successful pet-focused ecommerce platform Tough, bought stock and took an activist role to encourage the company to focus on online retail.
What happened next is a story for the history books. Individual investors coordinating on Reddit’s WallStreetBets board and other social hubs on the Internet noted that some companies had placed huge bets against GameStop and that buying the stock could trigger a short squeeze that would result in a sky-high stock price of Company.
GameStop went from trading at around $ 4 a share to $ 483 a share a year ago at the height of the recent short-squeeze mania. The stock recently pulled back significantly and are now trading in the $ 50 range, but investors looking for more explosive gains should not pile into the stock in the hope that it will enjoy another massive rally.
The short squeeze momentum that drove the stock’s incredible gains appears to have dissipated and would be difficult to recapture, even if online coordinating investors tried to take another push. GameStop’s incredible rally delivered huge wins for those early on, but shares are still up about 1,150% over the past year – all without much evidence of progress in the great e-commerce turnaround.
Sometimes it’s best to admire a flashy story from afar rather than wait for the chance to write yourself in it. There are plenty of other growth opportunities to be found in fast-growing markets, including cloud computing, artificial intelligence and augmented reality investors are likely to be, and I think most investors will be best served by avoiding GameStop at this point.
Tesla’s competition-free era is coming to an end
James Brumley (Tesla): Tesla revolutionized the automotive industry. CEO Elon Musk’s company wasn’t the first to make a successful electric car, but the first to make them cool.
The rivals are finally responding. General engines plans to offer 30 different battery-powered cars by 2025, and Ford Motor says it will invest $ 22 billion in its electric vehicle efforts by the end of the same year. A lot of other car makers are also making splashes of respectable size on the EV front. Of course, none of them seem to be in a position to catch up with Tesla after what can only be described as an escape year. In 2020, the company’s revenue grew 28% to $ 31.5 billion, leading to a turnaround to $ 721 million in profit. Given that the EV powerhouse is now viable, the 400% lead time of Tesla stock over the past 12 months is completely understandable.
The fact is, however, that the rally has pushed Tesla stock into a valuation, suggesting that competitors won’t ultimately make a dent in its dominance. Big mistake.
We’ve certainly seen in the past that the market underestimates burgeoning competition. Take Cisco (NASDAQ: CSCO) as an example. It was all the rage in the late 1990s when network solutions were in demand and few other options existed. Like other tech names, Cisco stock struggled during the dotcom crash of 2000 and then started to recover in 2002. But the stock has still not revised its early 2000 peak price. Newcomers like Juniper Networks and Aruba, meanwhile, ramped up their matches, preventing Cisco from regaining the kind of dominance it enjoyed a few years earlier. Intel is another name that still hasn’t returned to its all-time high in 2000, despite more than a decade of sustained progress. Advanced micro-devices and NVIDIA were both about 20 years ago, but both now became much tougher competitors for Intel. Never say never.
And if you need some numbers to flesh out the idea, the stock is currently priced at 31 times the selling price – not the profit, but sale – versus the S&P 500The current price-to-sales ratio of 2.8. Even if the company gets a valuation pass based on lagging earnings while it is still growing, stocks are still trading at an outrageous 67 times the 2025 consensus earnings per share of $ 12.03. And that’s an estimate from analysts who are also struggling to understand how much demand new electric vehicles from other manufacturers could be in as soon as they become available.
All of this is not to say that Tesla is doomed, or that it won’t remain the market leader in electric cars for the foreseeable future. It will survive and likely thrive. However, the stock’s valuation completely ignores burgeoning competition, paving the way for a downturn sooner or later. Reality always (ultimately) trumps the hype.
Don’t fall for the weed madness
David Butler (Sundial growers): If you want to market your stimulus check, you need to decide whether to invest or gamble. When investing, don’t get caught up in the battle of speculation around cannabis stocks.
We’ve seen most of the publicly traded cannabis supplies go wild in recent weeks, as a Democrat-controlled U.S. government drew more speculation for a legalized U.S. market. That doesn’t mean you should gamble with your $ 1,400 stimulus check. We’ve seen names like Sundial Growers rise 250% this week. The stock has become part of the Reddit retailer craze, and it is quite lacking in financial fundamentals to back up the run. In the third quarter of 2020, the Canadian cannabis producer lost 71.39 million Canadian dollars.
Overall, Sundial Growers has not seen a year of profitability as a publicly traded company. It recently saw attention for its offer to raise $ 74.5 million. In the release, the company said it had CA $ 610 million in unlimited cash after that offer. That money gives the company some ammunition, but it still doesn’t seem like the best name in the industry. The bigger names conquer most of the market share. Plus, sentiment in a legalized US market doesn’t mean Canadian businesses will thrive. It just means that traders can create hype.
If you want to use your stimulus check to get involved in the cannabis industry, look at something like Canopy growth (NASDAQ: CGC)Like most names in the cannabis industry, it has suffered its fair share of financial losses, but its connections with Constellation brands give it a long-term connection with the US market. Constellation invested billions in the company and could potentially acquire it later. It now has its former CFO in charge. If you really want to lower the risk, invest in Constellation Brands itself.
Don’t gamble with your stimulus check. As evidenced by the 20% drop in Sundial Growers shares on Thursday, these types of trades could just as well turn against you.
This article represents the opinion of the writer (s), who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We are variegated! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.