I took a look at three stocks to avoid last week, and my predictions went pretty well. The three investments declined between 6% and 29% for the week, all falling harder than the general market's nearly 5% slide. Weekly victories aren't the kind of stuff worth shouting from the rooftops when you're investing for the long run, but I'll take the 14% average decline on the three stocks.
The encouraging performance is also inspiring me to identify three stocks I see as vulnerable for the week ahead. I have some near-term concerns when it comes to Hertz (OTC:HTZG.Q), CarMax (NYSE:KMX), and Nikola (NASDAQ:NKLA). Let's size up all three scenarios.
Things don't end well in this scenario. The lenders take it from here, typically leaving holders of the common stock with worthless paper. However, even in this scenario, Hertz is inexplicably selling $1 billion in new stock, shares that have a good chance of being worthless as the Chapter 11 bankruptcy reorganization plays out.
Going from a lemon of a stock to a more financially sturdy automotive play, CarMax is one of the handful of companies reporting fresh financial results this week. This isn't a good time to be selling cars, even if CarMax is the class act in the used-car retailing game.
Auto ownership trends were already negative before the pandemic hit, and obviously the current climate is brutal. Analysts see sales at CarMax plummeting 55% for the quarter that ended in May when it reports on Friday morning. Wall Street's profit target over the past three months has contracted from $1.63 to $0.05 a share, and it could be even worse. Many of the more recent analyst updates on the stock find it posting a loss for the period.
CarMax has rolled out cost-cutting measures to help ease the sting of the pandemic, but things may never return to normal. If Hertz has to liquidate some if not all of its fleet, it's going to create a glut of used cars on the market. Driving trends may also take a long time to bounce back now that a lot of people are working from home. The biggest shocker is that shares of CarMax begin this new trading week trading slightly higher in 2020. It's going to need a great report to justify its gravity-defying stock, and that just doesn't seem likely.
One of this month's hottest debutantes is Nikola, a maker of electric tractor-trailers that's hoping to make a splash in the larger pickup-truck market. Nikola hit the market two weeks ago through a merger with special-purpose acquisition company. It opened at $37.55 on its first day of trading, and it enters this new week 70% higher than that.
Nikola has captured the heart of speculative investors since announcing that it would being taking reservations for Badger, its first pickup truck that promises 600 miles of emissions-free range through a battery pack and hydrogen fuel cell. New is always exciting, but there is still a lot about the potentially promising vehicle that we still don't know.
Nikola's founder bragged last week that his company's market cap surpassed Ford (NYSE:F) at one point during the stock's frenzied rally, a claim that was true when Nikola shares almost peaked at $34 billion. Nikola closed out the week just below Ford with its $25.7 billion market cap. Bears have hopped on that bragging point to suggest that Nikola is overvalued, but both sides aren't looking at the full picture. There's a lot of debt at Ford, and the more accurate value of the automaker pioneer is its $160.1 billion in enterprise value.
Either way, one has to be careful with new stocks. There are big risks to go along with the potentially big rewards of IPO investing. Nikola is going to be very volatile, and right now consumers and investors alike will need more details about its intriguing Badger and consumer demand to justify its current valuation.