For more than four months now, Wall Street and investors have been taken on the ride of their lives. Uncertainty and panic related to the coronavirus disease 2019 (COVID-19) pandemic completely pulled the rug out from beneath the stock market and ultimately sent the benchmark S&P 500 lower by 34% in a mere 33 days. It was the fastest bear market descent in history.
But we've also witnessed one of the strongest snapback rallies in history. The recently ended quarter featured the best returns for the broad-market indexes since 1998, with the technology-focused Nasdaq Composite galloping to new all-time highs. This rally has primarily been driven by tech companies benefiting from the work-at-home trend, as well as the FAANG stocks.
However, super rallies in the stock market often spur a lot of speculative buying. Right now, there are five exceptionally popular stocks that investors can't seem to get enough of lately that, frankly, I wouldn't buy with free money.
Let's begin with COVID-19 darling Moderna (MRNA 0.15%), which is a clinical-stage biotech company focused on RNA-based therapeutics and vaccines.
Through this past week, Moderna's share are up 199% year-to-date, with the vast majority of these gains due to mRNA-1273, the company's investigation COVID-19 vaccine. Over the past two months, things have moved quickly for Moderna, with mRNA-1273 getting the Fast Track designation on May 11 from the U.S. Food and Drug Administration, and the company reporting positive safety and tolerance data in a phase 1 study on May 18. The plan is for a 30,000-patient phase 3 study to begin in July, with Moderna being able to supply between 500 million and 1 billion doses annually if all goes well.
Sounds great, right? Well, call me not so convinced. A clinical-stage company with a $22 billion valuation is a tough pill to swallow, especially when a fat portion of this valuation is tied to a single vaccine. Historically speaking, vaccines that chase infectious diseases with pandemic potential aren't the moneymakers you'd think. Rarely, if ever, do one or two vaccine developers dominate the landscape in a broad indication, meaning multiple drug developers are left to share the pie, so to speak. Despite being ahead of its competitors in terms of its testing timeline, expecting Moderna to run away from the competition is a foolish (with a small "f") bet.
Another absolute head-scratcher is electric truck and hydrogen fuel cell-powered truck manufacturer Nikola (NKLA -1.40%), which is currently sporting a $21 billion valuation (even after sliding 13% to close the previous week) despite not having any revenue.
The bull thesis for Nikola has been (pardon the pun) fueled by the meteoric rise in Tesla (TSLA -1.10%), which closed above $1,200 for the first time ever on July 2, and surpassed Toyota to become the world's largest automaker by market cap. Investors in this day and age are less concerned about financials and more interested in how a stodgy industry is being reimagined by electric vehicles. It also doesn't hurt that Tesla's production and charging network throughout the U.S. has been steadily growing.
But the brass tacks here is that Tesla has more cars in space at the moment than Nikola has ever sold on Earth. It's a ridiculous statement that's 100% accurate. Nikola is asking for $5,000 deposits from potential buyers for an electric truck (the Nikola Badger) that doesn't even have a prototype yet. Production for the Badger is expected to begin next year, but that assumes no production issues. If Tesla serves as a historical reminder, there will be hiccups and challenges.
Nikola's stock is priced beyond perfection, at this point, and I wouldn't buy it with free money.
Among marijuana stocks, none is more popular with millennial investors than Aurora Cannabis (ACB -2.40%). This was a company that, at this time last year, was on track to be the leading cannabis producer in the world, and had access to approximately two dozen markets outside of Canada. But in spite of its ongoing popularity, the dream has gone up in smoke.
Since mid-March 2019, Aurora's share price is down almost 90%, which takes into account a 1-for-12 reverse stock split that saved it from being delisted off of the New York Stock Exchange. Aurora has been attempting to backpedal its way to profitability in recent quarters by closing five of its smaller facilities and halting construction on two of its largest projects (Aurora Sun in Alberta and Aurora Nordic 2 in Denmark). These drastic measures became necessary given the company's unsightly cash-burn rate and its limited access to capital, beyond issuing its own stock.
Aurora Cannabis' balance sheet is also a mess. Aside from insufficient cash and ongoing share-based dilution, I'd surmise that more than half of the company's total assets need to be impaired. This includes more than $2.4 billion Canadian in goodwill (51% of total assets), which signifies that the company grossly overpaid for most, if not all, of its acquisitions in recent years.
The pot industry has promise, but I'd avoid Aurora Cannabis like the plague.
Sometimes, individual stock moves cannot be explained with rational thought. That's my best explanation for the nearly 900% move higher in rental car company Hertz Global's (HTZG.Q) stock following its Chapter 11 bankruptcy announcement.
One possible reason for the mega-rally in Hertz was a short squeeze, with pessimists covering their downside bets at a rapid pace. It's also possible that speculators were (or perhaps still are) counting on a buyer for Hertz's business. Whatever the reason ultimately is for the rally, it makes no sense.
In case I haven't mentioned it, Hertz is bankrupt! This means there's a very good chance it'll be delisted from the New York Stock Exchange, and that nothing will be left over for the company's common stockholders. After all, Hertz had $19 billion in debt on its balance sheet when it filed for Chapter 11 bankruptcy protection, making it virtually certainty that any sort of debt restructuring and reemergence from bankruptcy will leave nothing for existing shareholders.
Even the company's 8-K filing with the Securities and Exchange Commission, when the company attempted to sell up to $500 million in common stock during the bankruptcy process, states that "there is a significant risk that the holders of our common stock... will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless." Do yourself and your pocketbook a favor and keep Hertz out of your portfolio.
Finally -- and I can already hear the cries of "blasphemy" from readers -- I wouldn't buy shares of streaming content provider Netflix (NFLX -1.78%) with free money.
To be clear, Netflix is certainly in a different class than Moderna, Nikola, Aurora Cannabis, and Hertz. It has shown the ability to generate an adjusted profit, and has continued to pad its bountiful worldwide subscriber count. During the COVID-19-impacted first quarter, the company signed up close to 16 million new global subscribers, pushing its paid membership to almost 183 million. And it also doesn't hurt that FAANG stocks, as a whole, have been unstoppable.
So, why avoid Netflix? The big issue I've always had is the company's negative free cash flow. Netflix continues to invest very aggressively in its international expansion, and as a result has been burning through its cash on hand for more years than I can count. I won't consider investing in a company of Netflix's size if it can't generate positive recurring free cash flow.
I'm also concerned Netflix is going to face increasing amounts of streaming competition, especially with COVID-19 forcing people to stay home. A number of large content providers have launched streaming services over the past year, and this could limit Netflix's subscriber growth moving forward.
Again, Netflix is in a completely different ballpark from the previous four names. However, its inability to generate positive free cash flow is a negative that can't be overlooked.