We turned the page around in 2020, but that does not mean we left last year’s volatility out the door. If anything, Wall Street and investors are becoming acutely aware of the uncertainty that has plagued the U.S. economy and equities over the past few weeks.
This historical volatility is clearly seen in the so-called YOLO – you only live once – stocks or “Reddit-raid” companies. We’re been looking at retail investors in community chat rooms for over a week now to work together to manipulate heavily short-selling stocks to create explosive pressure.
Suffice it to say that these are crazy times, and that investors are seeing truly historic (and probably unsustainable) returns.
In the course of February, five extremely popular stocks stand out as companies that investors would be wise to avoid like the plague.
Image Source: Getty Images.
GameStop
A common theme this month is to keep you away from stocks that are selling very short and that have broken free from their underlying principles. The poster child of this is a multi-channel retailer for video games and accessories GameStop (NYSE: GME). Even with certain brokers (ahem, Robinhood) restricting trading in GameStop, it still manages to end the month of January with a cool 1.625% higher. This is not a typo.
GameStop was the heaviest short-selling stock in January, making it the main target for retail investors in the r / WallStreetBets chat room on Reddit. The problem is that pessimism around GameStop wants to be grounded, especially since the company doubled several times last month.
GameStop has been forced to continue closing some of its brick-and-mortar locations to reduce costs. The company has been profitable for a long time, but has recently made three consecutive losses as the gaming ecosystem moves online. Although the company is slowly adjusting – sales of e-commerce during the holiday period of 2020 more than quadrupled from the previous year – it is unclear whether this will be enough to push the company back into the black.
Investors do not have to wonder about the long-term survival of a company that is worth $ 23 billion and has achieved more than 1,600% within a month. Therefore, GameStop should be avoided like the plague.
Image Source: Getty Images.
AMC Entertainment
Another key YOLO stock that should be avoided at all costs in February is the theater operator AMC Entertainment (NYSE: AMC).
AMC, one of the short-selling stocks, rose 278% last week. Although the company did raise $ 917 million in financing from a combination of debt and equity offerings, most of its share price increases appear to be Reddit-based trading activities rather than tangible.
There are three reasons why these astronomical gains in AMC are so severe. First, AMC averted bankruptcy a little over a week ago, but somehow ended up with a market value of $ 4.5 billion last week. Companies that manage to fend off bankruptcy with an 11-hour cash intervention are usually not worth $ 4.5 billion.
Second, we do not know when movie theater traffic will return to pre-pandemic levels. Restrictions on vaccines and new variants of the virus can make normal recovery difficult. In addition, the traditional film model can completely shatter the ability to access new content online.
Thirdly and finally, AMC is toying with the idea of selling even more shares from Friday 29 January. This is a great way to say that additional dilution is the investor’s direction.
Image Source: Getty Images.
Koss Corp.
Another Reddit darling to avoid like the plague is petticoat Koss (NASDAQ: KOSS). For the past 40 years, this manufacturer of headphones, Bluetooth speakers and various communication heads has never risen above $ 15. Last week, he reached $ 174 in pre-trading after closing at $ 3 and changing just a few days earlier.
Although Koss’s second-quarter operating results last week were not bad, it did not confirm the 1817% profit the company recorded over a five-day period. Sales during the first six months of fiscal 2021 were up 6% to $ 10.1 million, with net income of $ 0.09 per share. If we arbitrarily extrapolate these figures for the full financial year, Koss, which operates an extremely cyclical and commodified business, is valued more than 27 times more than 356 times the sales for the full year.
Koss’ high short-term interest rates and low float have made it a popular target for retail investors. But nothing about the current valuation makes sense.
Image Source: Getty Images.
Solar Growers
Marijuana stock Solar Growers (NASDAQ: SNDL) is another extremely popular name to add to the avoidance list after a run-up to 72% in January.
There is no doubt that cannabis is currently a very hot investment. The Democratic Party’s control of the White House and Congress has again made the discussion about the US possible to legalize cannabis at the federal level. That put a little pep in the step of all Canadian pot supplies.
However, Sundial Growers is not like most Canadian cannabis companies. While all Canadian licensed producers at one time or another issued shares to finance an acquisition or cover the daily expenses, the dilution of Sundial came like a tsunami to investors. In order to improve its financial position, the company sold its shares and converted part of its debt into equity. In fact, on Friday, January 29, the company announced a registered direct offer of shares and warrants of $ 100 million. In my more than two decades of my investment, I have seen few instances where the stock of a company is balanced so quickly.
In addition, Sundial Growers may need to do a reverse split to avoid delisting, and it continues to lose a lot of money as it shifts from wholesale cannabis sales to a higher-margin retail business model. This is one of the worst pot stocks investors can buy.
Image source: American Airlines.
American Airlines Group
Last but not least, American Airlines Group (NASDAQ: AAL) is a stock to avoid in February, and probably much further.
Unlike the other companies on this list, American Airlines achieved only 9% in January. Although the low share price is expected after the coronavirus pandemic to cause some investors (and many Robinhood millennials) to bet on a setback in the coming months and years, I consider American Airlines to be the absolute worst airline.
The company currently has a total debt of approximately $ 41 billion and a net debt of approximately $ 33 billion. Even with access to funding for coronavirus relief, the financial flexibility of the company is jeopardized by its debt burden. The service of its existing debt will limit most of its growth initiatives for years.
Furthermore, American Airlines no longer pays a dividend or repurchases shares due to the acceptance of coronavirus relief funds. The capital return program was perhaps the only good thing American Airlines wanted to do for it.
The airline industry is capital intensive with a low margin and relies on economic expansion, which is currently far from certain. This makes American Airlines completely avoidable.