Forget ghouls and goblins -- if you want to scare an investor, just show them a five-week chart of the benchmark S&P 500 between Feb. 19 and March 23. The S&P 500's 34% loss in roughly one month during the first quarter marks the fastest bear market decline in history.
Of course, the coronavirus disease 2019 (COVID-19) pandemic and record-setting volatility in the stock market aren't the only frights investors may have to cope with in the near term. A trio of exceptionally popular stocks currently looks more like trick than treat. Think twice before buying into these companies.
Cue the chorus of boos, but investors should be highly skeptical of electric vehicle (EV) manufacturer Tesla Motors (NASDAQ:TSLA).
As an investor, I can be highly skeptical of a company and still give credit where it's due. Tesla CEO Elon Musk has successfully achieved what hasn't been done in over five decades: creating a new car company from the ground up and reaching mass production. EVs are unquestionably the future of the automotive industry, and Tesla has been on the leading edge of EV and battery technology innovation.
But Tesla is also tricking its shareholders into believing it's firing on all cylinders (pardon the combustible engine pun). Though Tesla has reported five consecutive quarterly profits, four were solely the result of selling regulatory credits. In each of the past four quarters, Tesla has sold $133 million, $354 million, $428 million, and $397 million in regulatory credits, while generating generally accepted accounting principles (GAAP) net income of $105 million, $16 million, $104 million, and $331 million. Without these regulatory credits, Tesla isn't profitable on a GAAP basis. There are only so many credits Tesla can sell, which leads me to believe that future quarters won't have this tricky (but perfectly legal) boost to GAAP earnings.
Tesla investors also have to cope with the ups and downs of having Elon Musk as CEO. Though undoubtedly a visionary, he's also a bit of a loose cannon. He's been in hot water with the Securities and Exchange Commission more than once. He also has a long history of overpromising on new technology, at least concerning when new products or software will debut.
Tesla has been a massive treat for long-term shareholders, but looks to be more of a trick at its current valuation.
Another company that looks great but becomes questionable under scrutiny is biotech stock Inovio Pharmaceuticals (NASDAQ:INO).
Inovio has been on fire in 2020 given that it's one of roughly a dozen publicly traded drug developers testing a COVID-19 vaccine. The COVID-19 pandemic offers multibillion-dollar sales potential for biotech and pharmaceutical companies. In a phase 1 trial, Inovio's experimental INO-4800 vaccine elicited an immune response in 94% of patients.
Inovio is more trick than treat at this point thanks to two factors.
First, the Food and Drug Administration has put the company's phase 2/3 clinical trial on partial hold. There are no safety concerns, but the regulatory agency has questions regarding INO-4800 and its accompanying Cellectra delivery device that Inovio will need to answer before the study can proceed. The longer Inovio's experimental therapy remains on hold, the further it falls behind competing therapies.
Second, Inovio hasn't exactly shown investors much over the past four decades. While it's been able to raise cash through common stock offerings and U.S. government grants, it doesn't have a single approved therapy to show for it. Even if Inovio somehow trumps its poor drug development track record and brings a vaccine to market, it's unlikely to be the only drugmaker providing a COVID-19 vaccine.
At this point, the Inovio growth story looks to be all hype.
Young investors absolutely love marijuana stocks, and Canadian licensed producer Aurora Cannabis (NASDAQ:ACB) often tops the list. It's easy to like the pot industry with sales estimates for legalized weed soaring throughout North America. Still, it's important to realize that not every company is going to be a winner in this space.
By the midpoint of 2019, Aurora seemed to have it all. The company had peak annual output potential of more than 650,000 kilos with access to two dozen countries outside its home market of Canada. But since the midpoint of 2019, it's closed five of its smaller cultivation facilities, halted construction on two of its largest projects to conserve cash, and sold a separate 1-million-square-foot greenhouse that it never retrofit for pot production. It's also delivered very little in the way of international sales.
What has Aurora given shareholders? The wrong kind of buzz. In fiscal 2020, the company wrote down more than $2.8 billion Canadian, much of which was tied to its grossly overpriced acquisitions. Despite these huge losses, a recent SEDAR filing showed that the company's executives qualified for a healthy pay raise and bonus bump in the June-ended year.
Furthermore, Aurora Cannabis can't stop burning through its cash on hand and diluting its shareholders. The company recently completed a $250 million (that's U.S.) at-the-market offering and announced another $500 million ATM offering this week. This comes after Aurora's outstanding share count ballooned from about 1.3 million in June 2014 to 160.7 million as of October 2020.
Though marijuana should be a high-growth industry this decade, Aurora Cannabis isn't the stock to own in this space.