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5 Reddit Stocks to Avoid Like the Plague

By Sean Williams - Feb 25, 2021 at 5:50AM

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These momentum stocks have detached from reality (and their underlying fundamentals).

Buckle up and hold on -- 2021 might be just as volatile as its predecessor.

Over the past month, retail investors on Reddit's WallStreetBets (WSB) chatroom have created unprecedented volatility in some of the most obscure stocks on Wall Street. WSB members have effectively agreed to band together to purchase shares and out-of-the-money calls on stocks that are either heavily short-sold or very low-priced. Dozens of momentum-based short-sold or penny stocks have been whipsawed as a result.

While some of these momentum stocks are still significantly higher than where they were before the Reddit frenzy began, the fact is that many have detached from their underlying (and often poor) fundamentals.

If you've been watching these Reddit stocks fly, let me strongly suggest avoiding the following five.

A businessman putting his hands up, as if to say, no thanks.

Image source: Getty Images.

Sundial Growers

I get it -- marijuana is one of this decade's hottest growth stories, and I wholeheartedly agree. However, putting your money to work in Canadian licensed marijuana stock Sundial Growers (SNDL 4.66%) is one of the worst ways to take advantage of this growth.

If there is a positive that I can scrape together, it's that Sundial has dramatically improved its balance sheet. Following the exercising of warrants last week, I'd estimate it has around $680 million in cash on its balance sheet. If the U.S. were to legalize marijuana at the federal level, this capital would be key in helping Sundial enter the more lucrative U.S. market.

However, the way it improved its balance sheet is a serious red flag. Following countless share offerings, debt-to-equity swaps, and warrants being exercised, Sundial's outstanding share count has risen by more than 1.1 billion shares in less than five months. With something like 1.66 billion shares outstanding, it's going to be virtually impossible for Sundial to generate meaningful earnings per share in the future. 

Sundial is also shifting its operating model from wholesale to retail, which won't happen overnight. This is only going to exacerbate its quarterly losses at a time when most pot stocks are turning the corner to recurring profits. In short, Sundial is a cannabis stock to avoid.

A row of teenagers seated on a couch with video game controllers in hand.

Image source: Getty Images.

GameStop

Video game and accessories retailer GameStop (GME 26.25%) is the Reddit stock that truly started the frenzy. Even after losing more than 90% of its value from its intraday high set nearly a month prior, it still offers substantial downside.

The good news is that GameStop's management is getting aggressive with changes that are long overdue. The company is now heavily promoting digital gaming options, and stores are closing to reduce expenses.

The issue is that GameStop is making these changes from a position of weakness. Even with e-commerce sales growth of 309% during the holiday season, net sales still declined by 3.1% compared to 2019. GameStop has always been a brick-and-mortar-based company, and it's going to take a long time for it to transition to a digitally dominant operating model. The current calendar year will likely mark its fourth consecutive annual loss. 

It's not game over for GameStop, but it's certainly not worth $2.8 billion with the company continuing to lose money.

A physical gold Bitcoin lying atop a pile of one hundred dollar bills.

Image source: Getty Images.

Riot Blockchain

Some Bitcoin (BTC -2.44%) stocks are going to be in great shape no matter what happens to the world's most popular cryptocurrency. Meanwhile, others are tethered to its coattails and completely disassociated with their underlying fundamentals. The latter describes cryptocurrency mining company Riot Blockchain (RIOT 3.74%).

Since I've said something nice about Sundial and GameStop, I will note that, as Bitcoin increases in value, it's becoming more fruitful for Riot to mine Bitcoin. That's because 6.25 Bitcoin are paid as a block reward for validating transactions. That 6.25 Bitcoin was worth more than $355,000 as of this past weekend.

The problem with Riot Blockchain is that it doesn't rely on innovation. Considering how costly it can be to acquire and run mining equipment, it would be in big trouble if Bitcoin stopped heading higher. Yet, we've seen Bitcoin crash 50% to 80% on multiple occasions over the past decade, bringing into question how viable crypto mining is over the long run.

What's more, Riot Blockchain is valued at roughly 30 times Wall Street's consensus sales estimate in 2021. That's exceptionally lofty for a company without any real innovation.

A veterinarian examining a small white dog.

Image source: Getty Images.

Zomedica

Another Reddit stock to avoid like the plague is clinical-stage drug and diagnostic device developer Zomedica (ZOM 1.82%).

The good news for Zomedica is that it will commercially launch its Truforma point-of-care diagnostic system for cats and dogs at the end of next month. That means it's just five weeks away from beginning to generate revenue.

However, there's a big difference between launching veterinary diagnostic equipment and, say, introducing a new drug for humans. While the veterinary medicine industry is constantly growing, it's still just a fraction of the size of what human drug and device developers bring in annually. Based on Zomedica's $2.16 billion market cap as of last weekend, it's valued at close to 90 times forecasted sales for 2023. Profitability also remains a huge question mark.

Since the company was able to raise $173.5 million in a bought-deal offering less than three weeks ago, financing isn't an issue. But maintaining mid-cap status seems virtually impossible with losses ongoing and a price-to-sales ratio in the stratosphere. 

A couple eating popcorn while watching a film inside a crowded movie theater.

Image source: Getty Images.

AMC Entertainment

Lastly, investors would be wise to avoid movie theater chain AMC Entertainment (AMC 7.37%), which has sort of been GameStop's Reddit-frenzy sidekick from the get-go.

I'll note that AMC was able to raise $917 million via share and debt offerings between mid-December and mid-January, thus staving off bankruptcy. This capital should allow the company to survive well into 2021, presumably giving coronavirus vaccines the time needed to roll out and give broad swaths of the population immunity.  

Then again, it makes no sense that investors are paying nearly $2 billion for a company that isn't even guaranteed to survive beyond 2021. AMC's only means to raise capital are to dilute existing shareholders or potentially issue more debt capital.

Maybe the bigger concern is that the traditional movie theater operating model could go belly up. With AT&T's WarnerMedia releasing new movies on HBO Max in 2021 the same day they're slated to hit theaters, moviegoers might simply choose to stay home. More and more, it's looking like it could be lights-out for AMC.

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Stocks Mentioned

Sundial Growers Inc. Stock Quote
Sundial Growers Inc.
SNDL
$0.41 (4.66%) $0.02
GameStop Corp. Stock Quote
GameStop Corp.
GME
$145.40 (26.25%) $30.23
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$12.76 (7.37%) $0.88
Riot Blockchain, Inc. Stock Quote
Riot Blockchain, Inc.
RIOT
$6.67 (3.74%) $0.24
Zomedica Pharmaceuticals Corp. Stock Quote
Zomedica Pharmaceuticals Corp.
ZOM
$0.23 (1.82%) $0.00
Bitcoin Stock Quote
Bitcoin
BTC
$29,199.09 (-2.44%) $-730.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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