Nothing gets readers more “invested” in my articles then when I take a bearish outlook on a meme stock. So before I get into my list of meme stocks to avoid, I’d encourage you to take a peek at this article by John Tobey in Forbes. It seems I’m not the only one with a bearish outlook.
In the article, Tobey establishes that many of the top meme stocks have dropped 50% form their high points. That means it will take a 100% gain to get their price back to where they were. And I thought that was a good way of setting a criteria for which meme stocks I would look at.
I understand that there are two camps regarding meme stocks. The camp that believes fundamentals matter and the camp that believes they don’t. I’m firmly in the former. Price discovery is a normal, and mostly rational, part of investing. Put another way sometimes stocks have a low price tag for a reason.
But if you’re in the latter camp, I won’t try to change your mind. However, with many meme stocks on the retreat, I’ll explain why each of these seven stocks should be avoided at this time.
- AMC Entertainment (NYSE:AMC)
- GameStop (NYSE:GME)
- Clover Health (NASDAQ:CLOV)
- Newegg Commerce (NASDAQ:NEGG)
- Naked Brands (NASDAQ:NAKD)
- Sundial Growers (NASDAQ:SNDL)
- Sorrento Therapeutics (NASDAQ:SRNE)
Meme Stocks to Avoid: AMC Entertainment (AMC)
I’ve written about the fundamental problem facing AMC. That is, the pandemic allowed studios to calculate the direct-to-streaming market. They must have liked what they saw because they’re in no hurry to abandon the model.
But the retail crowd is nonplussed by what they believe is a phantom menace. They’ve got the CEO, Adam Aron in their hip pocket, at least for now. And despite a sharp selloff the week of July 11, AMC stock is rallying. Score one for the apes.
There’s no telling when all this will calm down. But when it does, here’s something for investors to consider. Analysts give AMC stock a 12-month price target of $5.20. On April 9, 2020 the stock closed at $2.60. If you bought shares on that date and held through all this craziness, you could potentially have a 100% gain at the end of the year.
Sadly, many investors bought at a much higher price. And that’s why the stock isn’t a buy at this time.
GameStop faces a slightly different problem than AMC Entertainment. In GameStop’s case, the problem is that they’re late to the party. The company’s shift to e-sports and digital sales is leaning into market trends. The difficult part will be for GameStop to carve out a meaningful niche in a sector that has loads of competition.
Another headwind for GameStop is the supply chain disruptions that affected consumer’s ability to get their hands on new gaming consoles. From a positive standpoint, it has potentially given the company a larger sales window. But with the company’s current share price all those sales, and much more, are baked into the price.
Like AMC, analysts are only bearish on GME stock in relation to its current overvalued price. The consensus price target for the next 12 months is $22. If you were told that at the beginning of 2020 when GameStop was trading at $5.88, you would have bought shares and held them with diamond hands.
If you bought at $300 a share, you’re holding with a different motivation.
Meme Stocks to Avoid: Clover Health (CLOV)
With short interest hovering around 27%, Clover Health appears to be primed to be driven higher by retail investors. At least that’s what I thought in early July. So far, the stock has managed to stay grounded, but that could change at any moment.
However, regardless of what happens to the stock price, CLOV stock presents investors with a challenge. On the one hand, if it goes “to the moon” as it did in early June, there will be some bag holders. On the other hand, if the stock stays where it’s at, analysts don’t forecast a whole lot of upside to the stock. The 12-month price target for the stock is $9.50 which is an increase of just 6.9% from the stock price at the time of this writing.
Clover Health is a Medicare insurance provider that offers its Clover Assistant Tool that uses artificial intelligence to perform predictive analysis to help determine the best course of treatment. I question the existence and/or the size of the company’s moat in this arena. And a larger concern is the company’s seeming lack of pricing power. That is, the company is losing money even as they add new clients.
Newegg Commerce (NEGG)
Newegg Commerce is one of the newest meme stocks. The catalyst for NEGG stock’s climb was its brief ability to supply in-demand Nvidia (NASDAQ:NVDA) graphic cards. Investors who were late to enter into the stock now face a difficult decision as there is no fundamental reason for the stock to climb back up to its lofty heights.
One reason for that is that the coveted graphic cards are used by cryptocurrency miners. And China cracking down on crypto mining will have an effect. Nevertheless, Reddit investors seem primed to take this stock higher.
Another reason is that, although it’s likely the company will deliver year-over-year revenue gains, companies like Newegg who distribute electronic products have very thin margins. That means that much of the company’s growth is already priced into NEGG stock which has a market cap of just over $10 billion.
The Reddit mob may not care about that. But that doesn’t mean you should overlook it. Unlike some meme stocks, Newegg has a business model that’s built to last. But not at its current price.
Meme Stocks to Avoid: Naked Brands (NAKD)
One of the interesting outcomes that is occurring with meme stocks is the ability to give a dying business a lifeline. That’s been the case with Naked Brands. The company appeared to be heading to bankruptcy. At the end of 2020, NAKD stock was trading at just 19 cents a share.
But that didn’t matter to the Reddit crowd. Naked Brands got caught up in the meme stock mania and shares soared to over $1.50 per share. The stock gave up most of those gains, but it still up over 160% for the year.
To be fair, the company is making the best of their good fortune. The company just issued 29.4 million shares in a $50 million at-the-market (ATM) offering. The company will be using the funds to execute its digital transformation. But retail investors are, at least for the time being, ignoring the fact that the offering just diluted the value of their current shares.
However, the company is dealing with a shrinking portfolio of brands and being a late arrival to the omnichannel model that is driving modern retail.
Sundial Growers (SNDL)
Someday, I’m confident that cannabis stocks will be good investments. That day isn’t here yet; but even if it was, institutional investors aren’t inviting Sundial Growers to the party. When I wrote about Sundial in March, I remarked that only 3% of its stock was owned by institutional investors. That percentage has remained essentially the same.
As other meme stocks have shown, that doesn’t mean that retail investors can’t take a stock “to the moon” if they put their collective will behind it. And with short interest of over 24% as of this writing, that seems to be the plan for SNDL stock.
As Faizan Farooque recently pointed out, the company is working with $1 billion of cash that it can deploy. But as a company that is still not turning a profit, investors have a right to be concerned about how the company will spend that money. The big payoff for the cannabis sector will only arrive when the United States legalizes marijuana. Congress is taking steps in that direction, but there’s no clear reason to believe that will happen anytime soon.
Meme Stocks to Avoid: Sorrento Therapeutics (SRNE)
Sorrento Therapeutics is a biotechnology company. That alone puts a risk premium on the stock. However, the company got swept up with the meme stocks due to its efforts to bring several Covid-19 related products to the market.
In addition to several diagnostic testing products, the company is developing Abivertinib as a treatment that can potentially be used on severe or critical Covid-19 patients by helping to prevent the cytokine storm that contributes to the disease progression and, in some cases, to fatalities. This has completed Phase 2 trials in Europe which is causing the bulls to run.
But even with concerns about the Delta variants as well as other variants that are sure to come, the vast majority of Covid-19 revenue has already been accounted for. Perhaps the company will be able to use any existing cash to fund their other products, which are still years away from coming to market.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.
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