Whether you're a relatively new investor or have been putting your money to work in the market for decades, there's always something new to be seen.
Last year, investors navigated their way through the quickest decline of at least 30% in the S&P 500's history. They also relished in a ferocious bounce-back rally that sent the benchmark index to new all-time highs less than five months after hitting a bear market bottom.
This year, the volatility remains, albeit from a different source. Since roughly the midpoint of January, retail investors on Reddit's WallStreetBets (WSB) chatroom have banded together to buy shares and out-of-the-money call options on stocks with high short interest -- i.e., companies where institutional investors and hedge funds are betting on share prices to decline. The goal of the WSB community being to effect a short squeeze, thereby sending short-sellers scurrying to the exit all at once and exacerbating the upside in a heavily short-sold stock.
While this has been a popular method to send stocks "to the moon" over the past seven weeks, the reality is that most heavily short-sold stocks are short-sold because they're poorly run businesses or have wildly detached from their underlying fundamentals. The following four heavily short-sold stocks fit that definition well and should be avoided like the plague.
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Sundial Growers: 41.3% of float currently held short
Among companies with a market cap of at least $2 billion, data from Finviz shows that Canadian marijuana stock Sundial Growers (SNDL 5.58%) has the highest short percentage, relative to its float. While retail investors might view this as the perfect buying opportunity for one of their favorite penny stocks, it's the market's way of saying that Sundial isn't a very good company.
Although Sundial is overflowing with cash -- in the neighborhood of $700 million, following the exercising of 98.3 million warrants last month -- the company has built up its war chest by drowning its own investors in registered direct offerings, at-the-market share sales, and debt-to-equity swaps. After ending September with a little north of 500 million shares, Sundial now has 1.66 billion outstanding shares. Plus, with a $1 billion shelf offering at its disposal, more share-based dilution seems almost assured to be on its way.
What's more, Sundial Growers' decision to shift its focus to the retail market comes at a time when most North American pot stocks are making a run at recurring profitability. Having to build its retail brands from the ground up puts Sundial well behind its competitors.
The point is, why pay 27 times forward-year sales for a money-losing pot stock when you can buy a number of profitable or nearly profitable marijuana stocks at a multiple of 5 times sales or less?
Image source: Getty Images.
Blink Charging: 48.9% of float currently held short
If the data screener is expanded to include public companies with a market cap of $300 million or higher, electric-vehicle (EV) charging products and EV services network provider Blink Charging (BLNK 3.48%) has the highest short percentage relative to float.
Even though EVs are the unquestioned future of the automotive industry, short-sellers have rightly piled into Blink Charging due to the uncertainty of its outlook. Think about this for a moment: The company is sporting a valuation north of $1.6 billion, yet generated only $3.8 million in sales through the first nine months of 2020. There are more than an estimated 1 million EVs on America's roads today, yet Blink is pacing only $5 million in 2020 sales.
Furthermore, the company is going to have to spend aggressively to carve out its role in an EV-dominated industry. The barrier to entry in developing EV charging and servicing solutions is relatively low, meaning competition is bound to pick up. This suggests that Blink is liable to lose money for years to come as it spends liberally on charging station expansion and perhaps charging product innovation.
No matter how far into the future investors look, a $1.6 billion market cap can't be justified.
Image source: Getty Images.
Inovio Pharmaceuticals: 24.6% of float currently held short
Clinical-stage biotech stock Inovio Pharmaceuticals (INO 4.39%) is another magnet short-sellers. At last check, nearly 25% of the company's outstanding float was held short by pessimists.
The bull case for Inovio would seem to be that there are multiple chances for the company to hit a proverbial home run. Between internally developed and externally funded clinical studies, the company has almost a dozen compounds under development to treat a variety of infectious diseases and cancers. Yet, over its more than 40 years as a drug researcher, Inovio has failed to have the U.S. Food and Drug Administration (FDA) approve any of its treatments.
Inovio generated plenty of buzz last year with the rapid development of INO-4800 as a potential treatment for the coronavirus. However, in September, the FDA placed a partial clinical hold on its phase 2/3 trial. Though it's been able to run the mid-stage portion of its study, the FDA hold on the larger late-stage portion remains in place. Meanwhile, three treatments have been approved by the FDA on an emergency-use basis in the U.S., and two others may also gain clearance in the coming months. Inovio's window to be a coronavirus pandemic player has nearly closed.
Always offering plenty of promise but lacking in end results, Inovio remains a stock to avoid.
Image source: Getty Images.
GameStop: 26.2% of float currently held short
Finally, no one should be surprised to see the stock that started the Reddit frenzy, GameStop (GME 0.90%), still among the most short-sold publicly traded companies. However, the percentage of shares held short now is considerably lower than where things stood toward the end of January.
The bull case for GameStop is that it's been delivering huge e-commerce sales growth. During the 2020 holiday season, e-commerce sales catapulted by 309% from the prior-year period. However, when examined as a whole, net sales fell 3.1% during the holiday season. That's because GameStop shuttered 11% of its physical locations from the prior-year period.
Though physical consoles and games, and the ability to purchase and resell used games, was a moneymaking operating model for two decades, gaming has shifted into digital platforms. GameStop simply waited too long to make shift. Even with its renewed focus on e-commerce, GameStop is effectively trying to backpedal its way back into the profit column by slashing costs. It'll likely be facing a fourth consecutive year of losses in 2021, despite the rapid growth in its e-commerce sales.
With GameStop struggling to reestablish its identity, an $18 billion market cap makes no sense. That's why the king of the Reddit rally stocks should be avoided like the plague.
