For investors, knowing when to cut ties with dead-end stock picks is always a challenge. It’s easy to remain idle in the hope that a given weak investment will suddenly turn positive. As Warren Buffett said, “Inactivity strikes us as intelligent behavior.” He meant that holding onto investments in fundamentally strong, profitable firms should be the crux of every investing strategy and struck his team as a smart decision.
Taken differently, we could understand his quote to imply that although inactivity strikes us as ‘intelligent’, it actually isn’t. I think that applies here. Passively hoping that the shares below will rebound is a poor strategy. These aren’t Buffett-style investments. Instead, they’re fundamentally weak firms lacking strong fundamentals and are due for further nose dives. Getting out of the top dead-end stock picks now is the best choice.
Dead-End Stock Picks: AMC (AMC)
Meme stocks like AMC (NYSE:AMC) catch a lot of flak for their association with what many see as a flawed investment style. In some cases that criticism is unfair. Meme stocks have come a long way since the beginning of the pandemic when the so-called ‘lockdown luminaries’ emerged. There’s much more nuance and traditional, empirical evidence-based investing advice today than a few years ago. Unfortunately for AMC, it remains a poor choice based on flawed thinking.
In other words, AMC deserves the criticism it receives. The movie theater business isn’t what it once was. Viewers now have many more options than they did in the recent past. That rapid shift has resulted in declining business prospects for AMC.
Unfortunately, AMC offers investors false hope in that regard. Revenues increased by 21.5% in the first quarter. That might lead some investors to mistakenly believe a turnaround is in effect. It isn’t – the upsurge is instead lingering Covid effects – and AMC continues to contract.
Just compare those ‘improved’ Q1 revenues of $954 million to those from 2020 and 2019 and the real narrative emerges. Q1 sales hit $941 million in 2020 and $1.2 billion in 2019. That should tell investors that AMC is going in the wrong direction.
Dead-End Stock Picks: Wynn Resorts (WYNN)
Wynn Resorts (NASDAQ:WYNN) stock is not necessarily destined for a nose dive, nor is it a particularly weak stock. But I do think it is overvalued even though it remains well below its target price.
The reason is fairly simple. Wynn Resorts is benefiting from the overall surge in tourism while remaining as fundamentally weak as it was a year earlier. While Wynn Resorts’ revenues increased by nearly 50% in the first quarter, reaching $1.423 billion, its losses did not narrow. The company remained roughly $1 million away from breakeven despite booming casino, room, food & beverage, and entertainment revenues.
Investors are likely waiting to see whether Wynn Resorts can actually make something positive of the bonanza in travel that’s been handed to the firm. Here’s why I’d bet against that: WYNN stock has proven that it doesn’t create value. The firm’s cost of capital exceeds the returns it receives from investing that capital. That’s the definition of value destruction which is part of the reason the company doesn’t see its losses narrow even though times are good in its industry.
Dead-End Stock Picks: GameStop (GME)
GameStop (NYSE:GME) is the other predominant meme stock investors know about. Like AMC, I’d argue that it’s more danger than it’s worth.
GME stock is simply not worth what it trades for. The few lingering Wall Street analysts that maintain coverage of the pandemic-era dark horse assign it a target price of $13. It trades for $24 so the risk is as clear as can be.
Even the $13 assigned to its shares looks extraordinarily generous based on the idea that GME was worth less than $1 in mid-2020.
Ryan Cohen has championed the firm into something that’s unique and difficult to define. The result is a sort of aura around the firm that has made it difficult to define through traditional pricing metrics. Rest assured, those traditional means will find a way to correct for current pricing.
Sales weakened during the first quarter and losses were substantial, though narrower. Just ask yourself the most important question when it comes to GameStop: Are consumers, or are consumers not increasingly utilizing digital services for gaming that invalidate most of GameStop’s business model?
Opendoor (OPEN)
Opendoor (NASDAQ:OPEN) stock is one of the more salient examples of technology meeting opportunity, leading to trouble. The company is a so-called iBuyer, a company that relies on pricing algorithms to dictate prime inventory to purchase.
It used that technological advance, and I use the term ‘advance’ lightly here, to entice investors that put vast sums of capital behind the firm. That turned it into a hot entrant during the pandemic and share prices spiked. Opendoor’s task was then to go out and use its algorithm to identify ideal markets and put that capital to work buying up investment houses.
It hasn’t worked well. Opendoor lost $101 million during the first quarter. Sales declined by 39% with home sales by volume down 35%. It has 6,261 homes on its balance sheet and is attempting to effectively de-risk its model and walk down inventory while avoiding catastrophe.
OPEN shares are a fair indictment of many of the issues afflicting the housing market currently. Beware, AI firms will be popping up that promise to have ‘fixed’ the iBuying algorithm problems that plagued Opendoor. They’ll be hyped in similar ways but let OPEN leave you once bitten twice shy and stay away.
Mullen Automotive (MULN)
Mullen Automotive (NASDAQ:MULN) recently announced a moratorium on investor financing throughout the remainder of 2023. The announcement will mean little for its extremely weak stock which trades for roughly a dime.
The company is telegraphing the idea to the public that it has sufficient cash and capital. Whether that’s true or not, share prices have fallen from $3.25 to $0.11 in 2023. That’s what matters. Mullen Automotive is a pre-revenue firm with operational losses that more than tripled YoY during the six months that ended March 31(1). Net losses increased, though relatively less, but still are approaching $500 million. It’s a prime example of SPAC largesse and overexcitement in the markets for the newest, hottest growth markets. When things go wrong in these markets, they really go wrong.
The single saving grace for Mullen Automotive is that it actually will record revenue in Q2 following the sale of 22 EV cargo vans for $308,000. That equates to a $14,000 per vehicle price on average. Does that seem likely to result in a sustainable business in the long run or more like a company looking to get any revenue on its books?
PetMed Express (PETS)
A lot of investors expect PetMed Express (NASDAQ:PETS) stock to decline sometime in the near future. Few metrics explain that idea better than short interest, which hovers near 27%. 27% short interest means that 27% of all shares floated have been borrowed under the assumption that they will decline in value, triggering a sale and profit for those sellers. In short, extreme bearishness.
Why not? Sales continue to decline, falling in both the last 12 months and the quarter. The $6 million in net income the company received in Q1 ‘22 became a $5.1 million net loss a year later.
PetMed Express increased its customer base by 12% in the first quarter. However, sales decreased by 5.4% during the same period. I don’t have to explain why that’s a net negative. But here’s a thought: The company has 12% more responsibility while simultaneously getting 5% less from that responsibility. If that weren’t enough, PetMed Express also has one of the most inflated P/E ratios of any firm, in the worst 0.5% to be precise. It’s extremely overvalued.
Beyond Meat (BYND)
Beyond Meat (NASDAQ:BYND) was a trendy stock in a trendy growth niche that looks to be fizzling. Hype may simply never materialize into anything tangible in the case of plant-based meats.
It presents a conundrum to investors in the case of BYND stock. Even now, the plant-based meat sector appears to offer a lot f hope. The compound annual growth rate expected between 2023 and 2027 is 14.7%. That’s a rate that can turn a little bit if capital, placed in the right shares, into a lot of capital pretty quickly.
But at the same time, Beyond Meat is clearly not growing at that rate. Revenues fell by 15.7% during the firts quarter. That leaves investors with a few possible explanations. Either forecasters are plainly wrong or Beyond Meat simply isn’t the right company to meat the growth opportunity.
I don’t know what the answer is there. I only know that Beyond Meat lost $59 million during the most recent quarter and that its burgers don’t appeal to me personally. Vegetables taste great, but vegetables formed into meat analogs don’t hold the same appeal. Maybe I’m not alone based on declining sales.
On the date of publication, Alex Sirois 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.
