Big things can come from small packages, but sometimes things are tiny for a reason. There are plenty of promising stocks trading for single-digit prices, but most of the investments trading below $5 are there for a reason. They're speculative. They're flawed. They're not going to make you happy.
AMC Entertainment (AMC 0.47%), Genius Brands (GNUS), and XpresSpa (XSPA 1.70%) are three stocks that have high risks despite their low stock prices. Let's go over why there are three stocks trading below $5 a share that you should avoid.
Hollywood is playing a game of chicken with multiplex operators, and AMC isn't going to win. It's not generally considered safe to see a movie at your local theater these days, and that means springtime and now summer releases aren't going to happen on the silver screen anytime soon.
AMC has pushed its reopening date to the latter half of August, but even when that eventually happens it will be to much thinner crowds than before. Folks have gotten used to paying up for premium entertainment streaming at home, where they can enjoy the latest releases comfortably and without having to worry about face coverings, overpaying for concessions, or being able to take a bathroom break without missing a chunk of the movie.
Movie studios are rolling with the changes. They've embraced digital delivery, and it will be an ongoing revenue stream even after theaters open. AMC may have been the world's largest multiplex operator heading into the pandemic, but it's going to emerge at the other end with a lot less clout than it used to have in the industry now that customers are consuming first-run movies in a new way.
Hype is a dangerous weapon, and unfortunately a lot of investors got burned since this small developer of animated content for children traded briefly in the double digits in early June. The stock has plummeted 83% since its peak, and it may still not be cheap enough to consider buying.
Genius Brands talks a big game, and over the years it has inked some big deals that ultimately don't produce. Reality doesn't live up to the press release here. Revenue clocked in at $5.4 million in 2017, only to fall below $1 million a year later. Revenue recovered to $5.9 million last year, but we're just a quarter into 2020 and trailing revenue is already down to just $5 million.
If you're wondering why we're debating the merits of a stock with just $5 million in trailing revenue after years of operations, consider that more than 53 million shares of Genius Brands traded hands on Wednesday alone. There are a lot of inexperienced traders chasing a business that has no business commanding a nine-figure market cap. This is a crowded and competitive niche.
Another speculative stock that spiked in early June before proving mortal is XpresSpa, a company that until earlier this year operated 50 locations at airports offering spa services and wellness-related merchandise. Folks aren't flying as much as they used to in the new normal, and when they do they certainly aren't going to go for a spa treatment at the airport.
XpresSpa was bid up last month after shifting gears by converting one of its failing storefronts into XpresCheck at New York's JFK, a new concept where airport employees can be tested for COVID-19. It's in active negotiations to expand XpresCheck elsewhere.
It makes perfect sense to roll with the changes by deploying the new model, but who will actually be using XpresCheck? Airports and individual airlines already have their safeguards in place, so why pay up for a middleman?
This is shaping up to be a lose-lose situation. If the novel coronavirus continues to linger, there won't be an uptick in demand for air travel, and airlines will have to scale back their operations and save money by doing as much as possibly on their own. If COVID-19 is eradicated, XpresCheck will be obsolete, but it will still take years before airport traffic returns to the point where these spas can generate nearly $1 million in revenue apiece. XpresSpa took advantage of the speculative interest in its stock earlier this year to beef up its liquidity, but it doesn't make the business anymore viable or valuable with the flight now descending.