The next round of stimulus tests is likely to bring a new increase in participation to retail investors, and investors supporting the right companies could eventually turn a $ 1400 check into a much larger amount. This will of course involve some risk, and it is fair to say that the stock market looks volatile.
With that in mind, we asked three Motley Fool contributors to sign a hot, high-yielding stock that they believe investors should stay away from at the moment. Read on to see why they think GameStop (NYSE: GME), Tesla (NASDAQ: TSLA), en Solar Growers (NASDAQ: SNDL) with your stimulus, money would be a bad move.
Image Source: Getty Images.
Do not try to recapture the magic
Keith Noonan (GameStop): The comeback rally for GameStop this past year was nothing short of incredible. The otherwise struggling retailer stock has started to rise following excitement over new video games from Sony and Microsoft. It got another boost with the news that Ryan Cohen, founder of the successful pet-focused e-commerce platform Tough, was buying shares and taking on an activist role to drive the business to focus on online retail.
What happened next is a story for the history books. Individual investors who coordinated on Reddit’s WallStreetBets board and other internet social hubs noted that some companies placed large bets against GameStop, and that buying the stock could cause a brief push that would lead to the company ‘s share price soars.
GameStop traded from about $ 4 a share a year ago to as high as $ 483 a share, while the recent short-press mania traded. Shares have recently retreated significantly and are currently trading in the $ 50 range, but investors looking for more explosive gains should not hope in the stock, hoping it will enjoy another big rise.
The momentum that drove the stock’s incredible gains seems to have disappeared and would be difficult to regain, even if investors coordinating online tried to make another push. GameStop’s incredible rally has been a huge victory for those who got it early, but the stock has still traded around 1,150% over the past year – and without much evidence of progress with its big turnaround in e-commerce.
Sometimes it’s best to admire a flashy story from a distance instead of waiting for the chance to try to write yourself into it. There are plenty of other growth opportunities in rapidly evolving markets, including cloud computing, artificial intelligence and augmented reality, and investors are likely to benefit the most from avoiding GameStop at this point.
Tesla’s competition-free era ends
James Brumley (Tesla): Tesla has made a revolution in the automotive industry. CEO Elon Musk was not the first to make a successful electric vehicle, but it was the first to make them cool.
Competitors are finally responding. General Motors plans to offer thirty different battery-powered cars by 2025, and Ford Motor says it will invest $ 22 billion in its electric vehicle effort by the same year. Quite a few other car manufacturers also make significant size splashes on the EV front. Of course, none of them seem to be able to catch up with Tesla after what can only be described as an outbreak year. In 2020, the leading company grew by 28% to $ 31.5 billion, raising profits to $ 721 million. As the EV power station is now viable, the rise of 400% that Tesla shares have seen over the past twelve months is completely understandable.
The fact is, however, that the Tesla shares have led to a valuation, suggesting that competitors will ultimately not make a dive into its dominance. Big mistake.
We have certainly seen in the past that the market underestimates emerging competition. Take Cisco (NASDAQ: CSCO) as an example. It was all the rage in the late 90s when networking solutions were in demand and few other options existed. Like other technology names, Cisco shares struggled in the dot-com crash in 2000 and then began recovering in 2002. But the stock has not yet reconsidered its early 2000 peak price. Newcomers like Juniper Networks and Aruba, meanwhile, supplemented their matches, preventing Cisco from re-establishing the kind of dominance it had enjoyed a few years earlier. Intel is another name that has yet to return to its everyday highs reached in 2000, despite more than a decade of sustained progress. Advanced micro-devices and NVIDIA were both about 20 years ago, but both have now become much tougher competitors for Intel. Never never never say.
And if you need a few numbers to illustrate the idea, the stock is currently 31 times more than the sales – not the earnings, but sales – opposite the S&P 500current price-to-sales ratio of 2.8. The shares are even given a valuation certificate to the company based on the decline while still growing still trades at a staggering 67 times 2025 consensus earnings per share of $ 12.03. And this is an estimate from analysts who are also struggling to grasp how much demand new electric vehicles can get from other manufacturers once they become available.
None of this is a suggestion that Tesla is doomed, or that it will not remain the EV market leader in the foreseeable future. It will survive and probably flourish. The valuation of the stock completely ignores emerging competition, but it will sooner or later backfire. Reality always trumps (ultimately) hype.
Do not fall for the potluck
David Butler (Solar Growers): If you want to put your stimulus test on the market, you need to decide whether to invest or gamble. When investing, do not get bogged down in speculating about cannabis supplies.
We have seen most of the exchange-traded cannabis stocks go wild over the past few weeks as a Democratic-controlled U.S. government has drawn more speculation for a legitimate U.S. market. That does not mean you have to risk your $ 1,400 stimulus test. We have seen names like Sundial Growers rise by 250% this week. The stock has become part of the Reddit merchant craze, and rather lacks financial principles to support the run. In the third quarter of 2020, the Canadian cannabis producer lost 71.39 million Canadian dollars.
Overall, Sundial Growers did not have a year of profitability as a public company. He recently paid attention to the $ 74.5 million offer. In the release, the company said it had CA $ 610 million in unlimited cash after the offer. This cash gives the company some ammunition, but it still does not seem to be the best name in the sector. The bigger names get the bulk of the market share. Moreover, sentiment in a legitimate U.S. market does not mean that Canadian companies will prosper. It just means traders can create hype.
If you want to use your stimulus test to get involved in the cannabis industry, look at something like Roof growth (NASDAQ: CGC). Like most names in the cannabis industry, it has seen a fair share of financial losses, but its commitments to Constellation Brands gives it a long-term connection with the US market. Constellation has invested billions in the company, possibly taking over along the way. It now has its former chief financial officer. If you really want to reduce the risk, then invest in Constellation Brands yourself.
Do not risk your stimulus test. As evidenced by the 20% drop in Sundial Growers’ shares on Thursday, this type of trade could just as easily turn against you.
This article represents the opinion of the author (s), who may not agree with the ‘official’ recommendation position of a Motley Fool premium advisory service. We are furry! When we question an investment thesis – even one of our own – it helps us all to think critically about investing and to make decisions that help us become smarter, happier and richer.