Dividend Stocks

Class-Action Lawsuits Hit STEM Stock

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One of the more intriguing stocks that investors are watching today is Stem (NYSE:STEM). Currently, STEM stock is up more than 7% on a rather bearish day for most equities. This move also comes despite a rather bearish trend for Stem in 2023. STEM stock has lost more than 40% of its value so far this year.

These significant losses have led certain law firms to step up and assert wrongdoing with the company’s previous special purpose acquisition company (SPAC) merger to go public. The law offices of Howard G. Smith, Bernstein Liebhard and Robbins Geller Rudman & Dowd have filed lawsuits over the past week, alleging wrongdoing with the company’s disclosures provided as part of its SPAC merger process.

These lawsuits all seem to center on the idea that shareholders should be compensated for losses that resulted due to false and/or misleading statements in the company’s previous disclosures. Allegations of “material weaknesses in internal control over financial reporting related to accounting for deferred cost of goods sold and inventory, certain revenue recognition calculations, and internal-use capitalized software calculations” have been cited as key issues which investors may not have been aware of when making their investments.

Let’s dive into what investors may want to make of these lawsuits — and STEM stock’s impressive move in light of these developments.

Why Is STEM Stock Up Today?

Generally speaking, when a company is slapped with a number of class-action lawsuits, that’s not a good thing for its stock price. Indeed, many of the allegations made by these law firms ought to concern investors.

Any sort of impropriety with respect to disclosures is a big red flag for investors. That’s because any sort of resulting payout to investors is likely to hurt the company’s financials, which already appear to be in rough shape. And in the meantime, the ongoing litigation is likely to hang over Stem’s head as well as remain a risk for new investors.

That said, there could be a few reasons why STEM stock is seeing upside today. Given its high level of short interest, speculators could be betting on a potential squeeze in the near term. Additionally, it could be possible that ongoing interest around artificial intelligence-related companies could be boosting Stem today. The company’s Athena platform provides battery hardware and software-enabled services for energy storage systems, powered by AI. With the relative outperformance of companies leveraging AI lately, this could be partly responsible for today’s move.

In either case, I remain skeptical about the recent move in STEM stock. New investors ought to be aware of the risks with this company before stepping in. Despite a relatively muted valuation, the fundamentals of this company don’t suggest that a 7% surge is warranted. We’ll have to see if the move holds, but I’m willing to bet STEM gives up much of today’s gains over the next few trading sessions.

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On the date of publication, Chris MacDonald did not hold (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 MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.