We've turned the page on 2020, but that doesn't mean we left last year's volatility at the doorstep. If anything, Wall Street and investors have been made well aware of the uncertainty still plaguing the U.S. economy and equities over the past couple of weeks.
This historical volatility has been readily apparent in the so-called YOLO -- you only live once -- stocks or "Reddit-raid" companies. For more than a week now, we've watched retail investors on community chatrooms band together to seemingly manipulate heavily short-sold stocks in order to create an explosive short squeeze.
Suffice it to say, these are crazy times, and investors are witnessing some truly historic (and likely unsustainable) returns.
As we move forward into February, five ultra-popular stocks stand out as companies that investors would be wise to avoid like the plague.
A common theme this month is going to be keeping your distance from heavily short-sold stocks that have detached from their underlying fundamentals. The poster child of this is multichannel video game and accessories retailer GameStop (GME -4.94%). Even with certain brokerages (ahem, Robinhood) restricting trading in GameStop, it still managed to end the month of January higher by a cool 1,625%. That's not a typo.
GameStop was the most heavily short-sold stock in January, making it the prime target of retail investors in the r/WallStreetBets chatroom on Reddit. The problem is, pessimism surrounding GameStop looks to be well founded, especially with the company doubling in value multiple times last month.
GameStop has been forced to continue closing some of its brick-and-mortar locations in order to reduce its costs. The company was profitable for a long time, but has lately produced three consecutive years of losses as the gaming ecosystem moves online. Though the company is slowly adapting -- e-commerce sales during the 2020 holiday season more than quadrupled from the prior-year period -- it's unclear if that's going to be enough to push the company back into the black.
Investors shouldn't have to wonder about the long-term survival of a company that's worth $23 billion and has gained more than 1,600% in a month. That's why GameStop should be avoided like the plague.
Another core YOLO stock that should be avoided at all costs in February is movie theater operator AMC Entertainment (AMC -4.92%).
One of the market's most short-sold stocks, AMC gained 278% last week. Although the company did secure $917 million in funding from a combination of debt and equity offerings, the bulk of its share price gains seems tied to Reddit-based trading activity rather than anything tangible.
There are three reasons these astronomical gains in AMC are so egregious. First, AMC narrowly averted bankruptcy a little over a week ago, yet somehow ended last week with a $4.5 billion market cap. Companies that manage to stave off bankruptcy with an 11th-hour cash infusion typically aren't worth $4.5 billion.
Secondly, we don't know when movie theater traffic will return to pre-pandemic levels. Vaccine supply constraints and new variants of the virus could make a return to normal difficult. Plus, the ability to access new content online could completely crush the traditional movie theater model.
Third and finally, AMC is tinkering with the idea of selling even more stock as of Friday evening, Jan. 29. That's a fancy way of saying that additional dilution is headed investors' way.
Yet another Reddit darling that should be avoided like the plague is small-cap Koss (KOSS -4.10%). Over the past 40 years, this manufacturer of headphones, Bluetooth speakers, and various communications headsets has never its stock ascend higher than $15. Last week, it hit $174 in premarket trading after closing at $3 and change just a few days earlier.
While Koss's second-quarter operating results released last week weren't bad, they in no way validated the 1,817% gain the company registered in a five-day period. Sales through the first six months of fiscal 2021 are up a modest 6% to $10.1 million, with net income of $0.09 per share. If we arbitrarily extrapolate these figures out for the full fiscal year, Koss, which runs a highly cyclical and commoditized business, is valued at more than 27 times sales and 356 times full-year net income.
Koss' high short interest and low float have made it a popular target for retail investors. But nothing about its existing valuation makes sense.
There's no question that cannabis is an especially hot investment right now. Democratic Party control of the White House and Congress has reignited discussion about the U.S. possibly legalizing cannabis at the federal level. This has put some pep in the step of all Canadian pot stocks.
However, Sundial Growers isn't like most Canadian cannabis companies. Whereas all Canadian licensed producers have issued shares at one point or another to fund an acquisition or cover day-to-day expenses, Sundial's dilution has come at investors like a tsunami. In order to improve its financial position, the company sold shares of its stock and converted some of its debt to equity. In fact, on Friday, Jan. 29, the company announced a $100 million registered direct offering of shares and warrants. In my more than two decades of investing, I've seen few instances where a company's share count has been ballooned so quickly.
Additionally, Sundial Growers may need to enact a reverse split to avoid delisting, and it continues to lose quite a bit of money as it transitions from wholesale cannabis sales to a higher-margin retail operating model. It's one of the worst pot stocks investors can buy.
American Airlines Group
Last but not least, American Airlines Group (AAL 1.54%) is a stock to steer clear of in February, and probably well beyond.
Unlike the other companies on this list, American Airlines had a modest gain in January of only 9%. While its perceived-to-be low share price following the coronavirus pandemic has some investors (and many Robinhood millennials) betting on a rebound in the months and years to come, I view American Airlines as the absolute worst airline stock.
The company is currently lugging around north of $41 billion in total debt and roughly $33 billion in net debt. Even with access to coronavirus relief funding, the company's financial flexibility has been compromised by its debt load. Servicing its existing debt will constrain most of its growth initiatives for years.
Furthermore, American Airlines is no longer paying a dividend or buying back stock as a result of accepting coronavirus relief funds. Its capital return program was perhaps the only good thing American Airlines had going for it.
The airline industry is capital-intensive, low-margin, and it relies on economic expansion, which is far from a certainty at the moment. That makes American Airlines wholly avoidable.