With the stock market surging, investors are looking at more speculative opportunities for outsized gains. But investors should be careful with low-priced equities, and in particular these three overvalued penny stocks. The allure of grabbing a multi-bagger penny stock is understandable. But traders should avoid these particular high P/E penny stocks. It’s easy to point to overvaluation risk, and with these three, the problem is perhaps even more fundamental.
Do any of these following companies have workable business models that can ever generate a profit? It seems fairly unlikely. In other words, it’s time to sell these three overvalued penny stocks today and never look back.
Clover Health (CLOV)
Clover Health (NASDAQ:CLOV) is a health insurance company that was supposed to disrupt the healthcare market. The one-time King of special purpose acquisition companies (SPACs), Chamath Palihapitiya, gave investors an inspiring vision of what Clover could become. Ultimately, however, it was not to be. Clover quickly failed to live up to the SPAC sponsors’ rosy expectations. The share price collapsed, and frustrated investors launched a class action lawsuit against Palihapitiya and Clover executives.
Clover still remains a publicly-traded company today, though shares are now below the dollar mark. Is there any hope of a turnaround? The odds are slim.
In Q1, the company’s revenues plunged to $528 million from $874 million in the same quarter of the prior year. The firm lost $73 million, only marginally better than the $76 million loss for the same period of 2022. The losses persist even amid heavy cost cutting. Adding insult to injury, Clover hasn’t even managed to become profitable on an adjusted EBITDA basis, which is the lowest of bars to clear.
Cl0ver hasn’t run out of cash yet, so there is still some chance. But the company was founded on trying to achieve rapid growth thanks to its purportedly superior technology. Now the growth has stopped but losses remain sky-high. It is unclear what purpose Clover serves when large incumbent health insurance companies benefit from operational scale and more seasoned management and operations.
Faraday Future Intelligent Electric (FFIE)
Faraday Future Intelligent Electric (NASDAQ:FFIE) is another in the long line of struggling recent SPAC deals. Shares are down from their initial $10 price to less than 25 cents today. Needless to say, Faraday Future has not been an astute investment pick. And there’s little reason that would change. In fact, shares could easily keep trending on down toward zero.
Faraday is still a development-stage company and has not generated any revenues to date. The company is quick to put out press releases about supposed innovations such as artificial intelligence (AI)-powered car designs. Yet is has been far less capable of actually producing or selling any vehicles, AI-influenced or otherwise.
The latest blow to FFIE stock investors came last week. The company announced plans to sell $300 million more in stock. With shares under 50 cents each, this will likely amount to more than half a billion shares of Faraday Future to be sold to the public. This will, needless to say, put immense pressure on the trading in Faraday shares for the foreseeable future.
Given the company’s inability to meet past revenue projections and business milestones, there is little reason to give this team the benefit of the doubt today.
Nikola (NKLA)
Nikola (NASDAQ:NKLA) is the electric vehicle company famous for its scandals. Nikola founder Trevor Milton became notorious for a scheme in which Nikola rolled a prototype vehicle down a hill to give the appearance of having a working product. The company has sought to clean up its act. There is new management now, and the company secured additional outside funding. It even built a factory in Arizona.
However, it remains unclear if Nikola will ever become a viable business. That’s because the firm is rapidly running out of money, and desperately needs to sell more stock to raise funds. However, shareholders, for whatever reason, have not voted in sufficient amounts to permit the company to sell more stock. Without it, Nikola may face potential insolvency in the not-too-distant future. Mr. Milton is now taking to social media in an effort to block the issuance of new shares, perhaps out of spite toward the management team that replaced him.
Will Nikola be able to raise enough money to keep the lights on? And is there any market demand for Nikola vehicles if it does ever actually get a product to market? No one knows. In the meantime, NKLA stock doubled off its recent lows, making for an excellent exit point for savvy traders.
On the date of publication, Ian Bezek 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.
