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3 Overvalued Stocks to Avoid in 2021

By Zhiyuan Sun - Mar 27, 2021 at 7:25AM

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Think twice before initiating a position in these value traps.

Overvalued stocks can be difficult to identify. They're frequently masked under the pretense of hype -- or even cheap valuations, when they in reality, they face a frightening amount of risk.

Being able to spot bad investments is just as important as being able to spot good ones. Today, let's look at why a green hydrogen fuel-cell company, a much-hyped pot grower, and a bargain 5G telecommunications network provider are among the most overvalued stocks investors should avoid in 2021. 

Couple frowning while looking at financial statements.

Image source: Getty Images.

1. Plug Power

In 2020, Plug Power's (PLUG 1.16%) gross billings increased by 42.5% to $337 million from a year ago. The green energy hydrogen company also has over $5 billion of cash and investments to fund its operations, with a guidance of $475 million in gross billings this year. Its Rochester, New York fuel cell production site will also come online this year, with a maximum output of 1 gigawatt per year. So why might the stock not be a buy?

As it turns out, green hydrogen fuel cells are increasingly being made obsolete by lithium-ion batteries, the costs of which have declined by as much as 88% over the past decade. Meanwhile, green hydrogen is extremely expensive to produce and transport, and are a bit lackluster in terms of energy efficiency. 

Producing just 1 kg of normal hydrogen requires burning coal, which releases tons of carbon dioxide into the atmosphere as a by-product. Manufacturing green hydrogen works by applying an electric current to water to separate it into its hydrogen and oxygen components, and then capturing the hydrogen.

But for the energy to be green, that electrical current needs to come from a renewable energy source, which is still somewhat inefficient compared to the regular process of using fossil fuels to produce hydrogen. To make matters worse, cars running on hydrogen fuel cells already have as much as four times the fuel cost each year as those running on electricity. So, until going green gets a bit cheaper, investors should note that Plug Power's technology has little competitive edge over lithium-ion batteries.

Plug Power currently trades for 34 times sales (P/S). Although that might seem cheap in the context of its own past (it once traded around 75 P/S), the company just recently announced it was facing accounting issues and needs to restate its financials going back to 2018. It is also in danger of not filing its 2020 10-K accurately or on time. It's a good rule of thumb to avoid initiating a position in a company if you cannot fully trust its statements. I recommend investors avoid the hype and check out some electric vehicle battery stocks instead.

2. Sundial Growers

Sundial Growers (SNDL -3.44%) is a marijuana company that is struggling to make ends meet. Instead of taking drastic steps to cut its losses, however, the pot grower has gotten into the habit of turning to the capital markets for cash. In July 2020, the company had less than 200 million shares outstanding. By March of this year, that number had grown to 1.66 billion.

While Sundial now has a market cap of $1.85 billion and a cash balance of $719 million, its spending problem is unresolved. Last year, the company lost a staggering $206.3 million Canadian dollars, which was a 45% increase over 2019. Keep in mind that Sundial's revenue only amounted a CA$60.9 million during the same period, which declined by 4.2% from 2019.

Investors may argue it's still worth holding on to Sundial stock because it takes substantial capital for it to capture market share in the lucrative Canadian marijuana market. Fair enough. The only problem is, Sundial's pot isn't particularly liked by consumers either. During Q4 2020, its national market share actually fell to 2.7% from 3.3% in Q3 2020. Given these reasons and the fact that its shares are trading at 6.8 times sales for negative growth, this is definitely the No. 1 pot stock to avoid this year.

3. Nokia 

With its shares trading at just 0.89 times revenue and 17 times earnings, many investors wonder why Nokia (NOK 2.07%) isn't considered a bargain 5G stock. However, if you look closely, Nokia's outlook looks far less rosy than what the company has promised it will be.. 

Last year, the company's revenue actually declined by 6% year over year to 21.9 billion euros. That is despite it seeing a 5G conversion rate of 90% from customers across the world and signing a five-year commercialization agreement for the technology with T-Mobile. Even having 45 5G networks and 195 commercial contracts has not helped Nokia become more profitable. In 2020, the operating margin for its telecom segment declined to 10.6% from 12.3% in 2019.

And the company's outlook is looking more bleak. It predicts that its revenue will fall to 20.6 billion euros this year, and its operating margin will decline to 7%. This is because consumers worldwide are rapidly abandoning Nokia's traditional 4G network for 5G, to which the company has yet to fully upgrade. At a time when just about every telecom provider is making bank on 5G adoption, it's best to stay away from Nokia stock and search for better alternatives

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Stocks Mentioned

Nokia Corporation Stock Quote
Nokia Corporation
$4.93 (2.07%) $0.10
Plug Power Inc. Stock Quote
Plug Power Inc.
$16.64 (1.16%) $0.19
Sundial Growers Inc. Stock Quote
Sundial Growers Inc.
$0.40 (-3.44%) $0.01

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

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