To be blunt, the past six weeks haven't been pretty for investors. Fear and uncertainty surrounding the spread of the coronavirus disease 2019 (COVID-19) has squashed equities and sent the stock market tumbling into bear market territory faster than at any point in its long history. With the scope of the economic damage caused by mitigation measures to slow the spread of COVID-19 still unknown, there could be further downside to come.
Then again, bear markets are historically a good thing. That's because they've always represented an opportune time for long-term investors to buy into sound businesses for the long run. Eventually, all bear markets have been completely erased by a bull-market rally.
Image source: Getty Images.
Unfortunately, not every company can be a winner. And when it comes to investing, it's important to remember that popular stocks aren't always profitable stocks.
With this being said, here are three extremely popular stocks with investors that should be avoided like the plague in April (and beyond).
Aurora Cannabis
Marijuana stock Aurora Cannabis (ACB -1.86%) isn't just a popular stock -- it's by far the most popular stock held by millennials on online investing app Robinhood. According to a forecast at the midpoint of 2019, this Canadian licensed pot producer was on track to produce 625,000 kilos of weed on an annual run-rate basis by the end of June 2020. Plus, billionaire Nelson Peltz was hired as a strategic advisor in March 2019, and a brand-name partnership was expected.
However, neither of these prognostications have come true or mattered for Aurora Cannabis, which has been nothing short of a dumpster fire. The company has halted production at two of its largest grow farms (Aurora Sun and Aurora Nordic 2) and plans to sell the 1 million-square-foot Exeter greenhouse that it acquired with the $2 billion MedReleaf acquisition. Exeter was expected to generate 105,000 kilos per year when retrofit to cannabis production.
All told, Aurora's peak output has been slashed by more than 400,000 kilos per year (at least for now), and the company has landed no major partners.
Image source: Getty Images.
What's even worse than sales forecasts badly missing the mark is the company's balance sheet. Aurora Cannabis ended 2019 with $156.3 million Canadian in cash and cash equivalents and CA$26.1 million in marketable securities, but outlined CA$373.6 million in expected liabilities over the next year in its management discussion and analysis filing with SEDAR. In other words, there could be a serious cash crunch brewing, even with the outlined reduction in production.
Also, Aurora's overzealous expansion efforts led it to grossly overpay for its acquisitions. Even after a monstrous CA$762.2 million goodwill writedown in the fiscal second quarter, the company is still lugging around CA$2.41 billion in goodwill, accounting for 52% of total assets.
Aurora Cannabis' operating losses are expected to continue and it has an abysmal balance sheet. Investors would be wise to steer clear.
American Airlines Group
Another popular stock among investors that's gained a lot of interest of late is American Airlines Group (AAL 6.60%).
American Airlines has been pulverized by the COVID-19 outbreak, as has the entire airline industry. However, the passage of the CARES Act -- that's the Coronavirus Aid, Relief, and Economic Security (CARES) Act -- apportions up to $50 billion to passenger airline companies as a form of bailout to keep them afloat and keep their staffs from being laid off.
This $50 billion parachute from the federal government has investors feeling a lot better about the airline industry, and American in particular. But this optimism is likely misplaced.
Image source: American Airlines.
I'll admit that, with very few exceptions, I'm not a fan of the airline industry. It's an exceptionally capital-intensive industry that often yields mind-numbingly thin margins and has shown time and time again that it doesn't fare well during recessions. And almost every airline dips deeply into debt to broaden and modernize their fleets.
In American Airlines' case, the company absolutely ballooned its debt load to modernize its fleet and wound up retiring planes that my Foolish colleague Adam Levine-Weinberg noted were far from needing replacement. The end result is that American is the most debt-burdened major of the group, with close to $30 billion in net debt. This is a deep hole from which I'm not certain it can dig itself out.
Furthermore, as one of the conditions of the CARES Act airline bailout, airlines will be prevented from buying back their own stock. The $11.9 billion American Airlines spent on buybacks over the past five years might be the only positive thing going for this company. Without buybacks and with dividends on the chopping block, major airlines are giving investors no reason to buy them -- especially the worst of the bunch.
Tesla
Lastly, hold the hate mail, but despite Tesla's (TSLA -1.06%) popularity, I believe it's worth avoiding the electric-vehicle (EV) manufacturer like the plague in April and for the foreseeable future.
On one hand, Tesla has a pretty long list of people it's proved wrong over the past decade. Clearly, CEO Elon Musk is a genuine asset for the company, and he's done something that hasn't been done in about five decades -- namely, build a brand new, mass-produced auto company from the ground up. But I don't believe Musk being a visionary is going to be enough to justify a $93 billion valuation in this economic environment.
A Tesla Model S plugged in to charge. Image source: Tesla.
Putting aside the fact that the company has shut down production at its Fremont factory per California's mandated shelter-in-place order, one of the bigger concerns I have following the coronavirus crash is how Tesla is going to compete with plunging prices at the pump. Crude oil recently hit 18-year lows, which'll soon make it cheaper than it's been in a long time to fuel up trucks, SUVs, and sedans.
The comparative advantage on price over fossil fuels has arguably been Tesla's biggest edge for the past decade, but in one fell swoop it's disappeared. This isn't to say that there won't be buyers who prefer greener options so much as to say that at least some percentage of the customer pool will now be lost due to much lower gasoline prices.
This is notable because Tesla very much needs rapid growth to produce an income statement that justifies a $93 billion valuation. Only recently did Tesla cross the 1 million-vehicle mark since the release of its first EV in 2008, which is a production figure that many of its gas-powered competitors can produce in less than two months. Although Tesla has benefited frequently from zero-emission vehicle credits, the fact is that the company still hasn't produced a generally accepted accounting principles (GAAP) profit on an annual basis.
Other factors to consider here are Elon Musk's poor track record of meeting timelines when introducing new vehicles, as well as Tesla's awful acquisition of SolarCity, which has been losing money hand over fist.
Tesla has remained irrational longer than the naysayers have been able to stay solvent, but a recession just might be what opens investors' eyes.
