One year ago, the coronavirus disrupted equity markets to a degree never before seen.
The benchmark S&P 500 lost 34% of its value in less than five weeks before commencing an 11-month mega-rally.
In 2021, it’s been retail investors who have disrupted the stock market.
Traders on Reddit’s WallStreetBets chat room, along with an army of Robinhood retail investors, have descended on dozens of heavily short-sold companies or penny stocks in an effort to send their share prices skyrocketing.
In some instances, it’s worked.
But the Reddit and Robinhood retail frenzy has created a growing list of publicly traded companies that are wildly detached from their underlying fundamentals.
Despite being ultra-popular, you couldn’t give me free money to buy the following seven stocks.
Sundial Growers
No marijuana stock is flashing more warning signals at the moment than Canadian licensed producer Sundial Growers (NASDAQ:SNDL). Even though Sundial has drastically improved its balance sheet following a number of share offerings and debt-to-equity swaps (the company holds approximately $610 million in cash at the moment), it’s done so by drowning its investors in share issuances. The company’s outstanding share count has increased by more than 1 billion since Sept. 30, and its board just OK’d a mixed-shelf offering that could allow it to sell up to $1 billion worth of additional shares. The dilution here is off-the-scales bad.
Additionally, Sundial is transitioning from lower-margin wholesale cannabis operations to higher-margin retail sales. Though it’s a smart move for the long run, it’s nonetheless well behind other Canadian licensed producers. Following multiple writedowns in 2020, Sundial’s operating results confirm this is a stock worth avoiding.
GameStop
Video game and accessories retailer GameStop (NYSE:GME) is the poster child of the Reddit frenzy. At one point, retail investors were able to send shares to within a whisker of $500 in pre-market trading in late January. Today, GameStop sits at close to $41, down more than 90% from its intraday high. Nevertheless, it still has plenty of room to fall further.
The issue with GameStop is that it waited far too long to tackle digital downloads. Sure, the company’s e-commerce sales are growing by triple digits, but they make up a small percentage of total sales. GameStop has always been brick-and-mortar based, and it’s been busy closing some of its stores to reduce costs and backpedal its way back into the profit column. In other words, GameStop is not operating in a position of strength, like its recent share-price appreciation would indicate. That makes it wholly avoidable.
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