Last year was nothing short of a roller coaster ride for the investing community. The benchmark S&P 500 initially lost 34% of its value during the first quarter of 2020, but spent the next nine months in all-out rally mode. The widely followed index ended the year with an above-average gain of 16%.
But turning the calendar to a new year didn't leave this heightened volatility behind. Instead of the coronavirus pandemic whipsawing equity valuation, it's now groups of retail investors on Reddit's WallStreetBets chat room who are responsible for historic volatility in either heavily short-sold companies and/or penny stocks.
Among the favorites of the Reddit crowd are video game and accessories retailer GameStop (GME 1.50%), movie theater operator AMC Entertainment (AMC -0.88%), and Canadian marijuana stock Sundial Growers (SNDL 10.11%). These companies are higher by 519%, 315%, and 191%, respectively, since the year began.
Image source: Getty Images.
These Reddit stocks will likely implode
Unfortunately, all three Reddit-frenzy stocks have become grossly detached from their underlying fundamentals. In plain English, their valuations don't make a heck of a lot of sense given their business outlooks.
For instance, while GameStop did deliver 309% e-commerce growth during the holiday season, total sales still declined by 3%. That's because the company closed 11% of its stores on a year-over-year basis. It waited far too long to embrace digital gaming, and it's now trying to backpedal into the profit column by closing stores and cutting costs.
AMC Entertainment is arguably in much worse shape. The $917 million it raised by selling stock and debt capital between mid-December and mid-January helped it stave off bankruptcy (for now). Pandemic-related shutdowns and significantly reduced theater traffic mean AMC's operating model is unlikely to return to normal anytime soon. To boot, select streaming providers are showing new movies on their own platforms in 2021, which is a direct threat to the movie theater operating model.
Meanwhile, Sundial Growers is swimming in cash: about $680 million, by my calculation. But it was only able to raise this war chest by drowning its investors in share issuances, warrant exercises, and debt-to-equity swaps. The outstanding-share count has risen by more than 1.1 billion in five months, and this dilution shows little sign of slowing. The company is also nowhere near profitability at a time when most marijuana stocks are going green.
These are some of the best stocks you can buy right now
Put simply, these are three terrible companies. My suggestion would be to forget about them and buy into companies that have tangible growth potential and offer real innovation and/or competitive advantages. Here are three of the best stocks you can buy right now.
Image source: Getty Images.
Salesforce
There aren't too many trends I'd be comfortable locking in for double-digit growth throughout the decade; but cloud-based customer relationship management (CRM) is one such trend that has a fantastic outlook. That's why salesforce.com (CRM 1.05%) makes for a much smarter buy than GameStop, AMC, or Sundial.
Without getting overly technical, CRM software helps companies with consumer-facing operations grow. It can accomplish simple tasks, like logging customer information and resolving service issues, or be used to manage marketing campaigns. CRM software is perfect for retail and service-oriented companies, but is finding a home in sectors and industries well beyond these obvious sources.
Salesforce is the market-share behemoth in cloud-based CRM software. Based on data from IDC in the first half of 2020, Salesforce controlled almost 20% of global CRM share. That's more than the No. 2 through 5 companies combined. CEO Jack Benioff is angling to push Salesforce to north of $50 billion in sales by fiscal 2026, up from the $21.3 billion recorded in fiscal 2021.
The company is also willing to spend big to increase its reach. In December, it announced its largest acquisition in history: a $27.7 billion cash and stock offer for Slack Technologies. Slack's enterprise communications platform is going to be perfect for Salesforce to use as a jumping-off point to cross-sell to small and medium-size businesses.
Image source: Getty Images.
Jushi Holdings
The marijuana industry should be a source of fast, sustainable growth throughout much of the decade. Perhaps no marijuana stock looks to be a better bargain at the moment than small-cap multistate operator Jushi Holdings (JUSHF 4.53%).
The reason Jushi stands out in what's becoming a crowded field of multistate operators is its focus on limited-license states. These are states that have legalized cannabis in some capacity, but limit either the number of retail licenses issued, or assign licenses based on jurisdiction. Well over three-quarters of Jushi's 2021 sales are expected to come from Pennsylvania, Illinois, and Virginia. The latter assigns dispensary licenses by jurisdiction, while the former two limit statewide retail licenses. The point is that Jushi should have no trouble building up its brand with competition limited or virtually nonexistent.
Another catalyst for Jushi is that its executives and insiders have a vested interest in the company's success. Approximately $45 million of the first $250 million in capital raised by the company came from execs and insiders. Aligning the interests of investors with management usually leads to solid long-term gains.
Jushi is also cheaper than its peers, relative to future sales. Whereas most cannabis stocks are valued at north of 3 times projected sales in 2024, Jushi can be scooped up for under 1.5 times Wall Street's consensus sales in 2024. Plus, the company should turn the corner to recurring profitability this year.
Image source: Getty Images.
Vertex Pharmaceuticals
Most biotech stocks lose money. Thankfully, Vertex Pharmaceuticals (VRTX 1.25%) isn't like most biotech stocks.
The reason Vertex is one of the best stocks investors can buy right now is its overwhelming success in developing treatments for cystic fibrosis (CF), an incurable disease characterized by thick mucus production that can obstruct the lungs and pancreas. It has been able to develop multiple generations of mutation-specific drugs to improve the quality of life and lung function of CF patients.
The newest in a long line of blockbusters for Vertex is combination therapy Trikafta. After getting the thumbs-up from the Food and Drug Administration five months ahead of schedule, Trikafta generated close to $3.9 billion in net sales during its first full year on pharmacy shelves. It tackles the most common genetic CF mutation.
Vertex is also expected to use its quickly growing cash pile to make acquisitions. Aside from a half-dozen unique compounds in development, it would be wise for the company to expand its revenue stream beyond CF. Even though CF sales are protected for a long time to come, Vertex is constantly looking toward the horizon. That's good news for patients and investors.
