The market had a choppy August as traders digested the latest developments from a busy earnings season and a hawkish Federal Reserve. While the overall market is volatile, we’ve seen some large speculative run-ups amid small-cap stocks.
For these three small-cap stocks to sell, it’s time to cash in on their recent rallies before the enthusiasm runs out. All three of these names popped more than 50% in August and look set to plunge in the rest of 2023.
Moneylion (ML)
Moneylion (NYSE:ML) is a FinTech lending and consumer finance platform. It aims to be the “go-to money destination.” So far, it has struggled to achieve that end; revenue growth has slowed down dramatically, and the firm remains dramatically unprofitable. Things looked particularly grim in the most recent quarter with consumer revenues growing just 6% while operating losses widened.
Bulls would argue that Moneylion shares are cheap on a price/sales basis. But this is the wrong metric to use. Risky lending companies almost always trade at low P/S ratios. Leading high-yield personal loan lender OneMain Financial (NYSE:OMF) and large credit card lender Capital One (NYSE:COF) both go for around 1x revenues and are exceptionally profitable. It’s unclear why Moneylion should fetch a higher valuation given it is even riskier as it isn’t anywhere close to profitability yet.
A whole bunch of FinTech companies, Moneylion included, went public a few years ago selling investors visions of tech-enabled financial platforms that should sell at high P/S and EBITDA multiples. But, in reality, these are lending businesses — and by all appearances, often not even particularly well-run ones. Traders are right to sell these and move on. That’s especially true for ML stock in particular after its unwarranted August rally.
Taysha Gene Therapies (TSHA)
Taysha Gene Therapies (NASDAQ:TSHA) is a clinical-stage biotech company attempting to address Rett Syndrome, a rare disease that can lead to seizures, developmental disabilities, and coordination problems among other symptoms.
TSHA stock became one of the biggest winners on the stock market in August, with shares rising more than 400% over the past month. However, it’s time to pump the brakes on that rally, at least for now.
Yes, Taysha reported positive results in its Phase 1/2 trial. However, investors should note that this trial is, so far, based on just one patient. Encouraging results are always good news, but Taysha will need to enroll more patients and get a bigger data set to provide more confidence that the drug is on a successful path toward FDA approval.
The company also recently raised $150 million in a private placement. That’s positive to the extent that it funds the company through mid-2025 at the current burn rate. Taysha could one day emerge as a serious player in rare disease treatment. However, the 400% run-up in TSHA stock based on a one patient trial seems premature.
EOS Energy Enterprises (EOSE)
EOS Energy Enterprises (NASDAQ:EOSE) is a small energy storage company. EOSE stock has been exceptionally volatile over the past year, rising from a low of 96 cents to a peak of $5.67 in June. Since then, the stock lost more than half its value before bouncing back more than 50% higher in August.
The uncertainty comes due to the unclear nature of Energy Operating System’s (EOS) business model and balance sheet. EOS generated just $18 million in revenues last year and projections are for around $30 million this year. However, analysts see that figure leaping to $238 million in 2024 and more than $500 million the year after.
If that actually plays out and EOS’ energy storage business sees exponential growth, the stock could be a winner. However, that outcome seems unlikely.
Short-selling research firm Iceburgh Research has raised substantial doubts about Bridgelink Commodities, the single firm that makes up the majority of EOS’ purported orders backlog. Meanwhile, EOS has a balance sheet that is in bad shape.
If revenues fail to materialize as planned, EOS will likely have to raise tons of capital and dilute shareholders dramatically. The firm’s current $500 million market cap seems way too steep given these concerns.
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.
