Following the most breakneck bear market in history during the first quarter of 2020, the broader market has spent most of the past 9 1/2 months in all-out rally mode. Tech, healthcare, and pretty much anything perceived as innovative or high growth have been off to the races in this environment of historically low interest rates.
But as equity valuations explode into the stratosphere, investors will have to be more critical than ever when analyzing potential investments. There are three popular companies I'm following right now that have been red-hot in recent weeks. But I wouldn't consider investing in these stocks -- even if I were offered free money to do so.
Since late October, shares of Canadian marijuana stock Aurora Cannabis (NASDAQ:ACB) have catapulted from under $4 to end this past week at $9.99.
This sudden resurgence for the most popular pot stock among millennial investors on Robinhood has to do with the possibility of the U.S. legalizing cannabis at the federal level. Aurora received one heck of a boost following President-elect Joe Biden's victory in November, and benefited from a second wave of bullishness when Democrats won both Georgia Senate runoffs on Jan. 5. Considering the many regulatory and supply issues Aurora's domestic market has dealt with, expanding into the U.S. is viewed as a panacea.
Unfortunately for Aurora, there isn't a guarantee that a Democrat-led Congress will legalize weed. Let's not forget that Biden has offered support for decriminalization and rescheduling marijuana, not legalizing it.
Even if legalization were to occur, Aurora Cannabis isn't necessarily in position to benefit. The recently announced merger between Aphria and Tilray puts that duo on better footing with regard to production costs, distribution network, and available capital. Meanwhile, Canopy Growth has agreed to acquire Acreage Holdings on a contingency basis if weed is ever legalized. This would give Canopy an immediate network of U.S. retail locations. The point is, given Aurora's minimal access to capital (other than selling its stock) and lack of a major partner, U.S. legalization wouldn't be a surefire victory for the company.
Aurora Cannabis' cash position is another point of avoidance. The only way it's been able to raise any capital with consistency is by selling its stock. Since April 2019, Aurora completed separate at-the-market (ATM) share offerings of $400 million and $250 million, and its board OK'd another $500 million ATM offering last year. Tactics like this have ballooned the company's outstanding share count by more than 11,800% since June 2014, and crushed shareholders.
Marijuana stocks can be a great investment, but I wouldn't touch Aurora Cannabis with a 10-foot pole.
Another stock that I wouldn't consider investing a dime into, even if that money were free, is enterprise analytics software provider MicroStrategy (NASDAQ:MSTR).
Since its meteoric rise during the dot-com bubble, MicroStrategy had mostly been off of Wall Street's radar. That's changed in a big way recently, with CEO Michael Saylor pouring the company's excess balance-sheet capital into the largest cryptocurrency in the world, bitcoin. In fact, the company issued $650 million in convertible debt in order to invest even more money into bitcoin.
According to cryptocurrency news site CoinDesk, MicroStrategy had 70,470 bitcoin tokens as of mid-December, with an average price of $15,964 per token. With bitcoin surpassing $40,000 last week, it's an investment that's paid off big-time in a short amount of time.
The reasons I wouldn't touch MicroStrategy are twofold. The first and bigger reason is that I don't see anything unique or game-changing about bitcoin, and believe it to be the world's most dangerous investment. As I've previously argued, there's a battle between bitcoin's scarcity and utility that isn't good news for investors. Its scarcity is based on false pretense, and it has minimal utility, at best, with the vast majority of tokens held by a small percentage of investors. This means these tokens are out of circulation.
The true value of the crypto revolution lies with its blockchain technology and not the tethered tokens. The ability to develop blockchain that relies on fiat currency, or perhaps no digital token at all, further decreases the utility argument for the world's largest cryptocurrency.
The second reason is that MicroStrategy's operating results aren't anything to write home about. Sales through the first nine months of 2020 are down by close to 1%, and the company's operating loss actually widened by $3.4 million to $14 million. In other words, a company with no top-line growth that's basically riding bitcoin's coattails is now valued at just over 10 times sales. That's a big "No thanks!"
Finally, no amount of arm-twisting could convince me to invest free money into electric-vehicle (EV) manufacturer Tesla (NASDAQ:TSLA).
There's no question that CEO Elon Musk deserves credit for doing what hadn't been done in more than five decades. He took an auto concept and built it from the ground up into a mass-produced vehicle. In 2020, Tesla fell just a few hundred vehicles shy of 500,000 deliveries. What's more, the company continues to hold tangible range and power advantages on the battery front over its U.S. rivals.
But after ending the previous week with a valuation of $834 billion, there are no shortage of reasons I'm enticed to keep my distance.
For one, Tesla isn't even profitable on a recurring basis. It's been able to report adjusted profits in recent quarters because it's been selling renewable energy credits to other automakers. Essentially, investors have awarded Tesla with a more than 2,000% run-up since May 2019, but haven't even taken the time to realize that it's not profitable from selling EVs.
To add to the above, the margins on vehicle sales (EVs and combustion-engine cars) are typically low. That's why historic price-to-earnings multiples on automakers are usually in a range of 5 to 15. Comparatively, Tesla's forward P/E ratio is north of 220.
I'm also highly skeptical of Tesla being able to maintain its dominant market share and technological advantages. For example, General Motors is investing $27 billion into EVs and autonomous vehicles between 2020 and 2025, while Ford announced an $11 billion investment into EVs through 2022. These are companies with historic brand value and the infrastructure to handily outproduce Tesla.
When this bubble does burst, I don't want to be anywhere near Tesla.