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3 Popular Stocks That Are Disasters Waiting to Happen

By Timothy Green - Apr 3, 2021 at 8:30AM

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Steer clear of these red-hot stocks.

A lot of money has been made this year buying stocks of questionable value. Shares of GameStop (GME -3.56%), AMC (AMC -8.03%), and MicroStrategy (MSTR -3.81%) have delivered impressive returns, up 900%, 360%, and 80%, respectively, in 2021.

My advice: Get out while you still can. There's just no good reason to invest in any of these low-quality companies.

Man making thumbs down with his hand.

Image source: Getty Images.

GameStop

Shares of video game retailer GameStop soared earlier this year on Reddit-fueled euphoria. Then it crashed, and now it's soaring again. The company is valued at around $13 billion despite a doomed business model and little chance of a turnaround.

The problem with GameStop is that it makes its money selling used games, and the concept of a used game will become a thing of the past as games are increasingly bought digitally. GameStop sells plenty of game consoles and new games, especially when new game consoles launch, but those are low-margin products.

Based on GameStop's last reported numbers:

  • New game hardware carries a gross margin just above 10%.
  • New game software carries a gross margin in the low-20% range.
  • Used games carry a gross margin in excess of 40%.

GameStop, as a business, just doesn't work without used games. Sales of used games have been declining for years, and that trend will likely continue as more people buy games directly through their game consoles.

Shifting to e-commerce won't fix GameStop's low margins on new video game products, and there's plenty of online competition from the likes of Amazon, Best Buy, and other big box stores. The company could sell new shares at inflated prices to raise cash, which will give it more time to figure something out. But that's just not a very compelling investment thesis.

GameStop stock has certainly delivered impressive gains this year, but those gains are supported by nothing at all.

AMC

Movie-theater chain AMC also got caught up in the Reddit-driven euphoria, pushing shares up dramatically this year despite a debt-logged balance sheet and huge uncertainty over the future of the movie-theater business. The pandemic has accelerated the shift to streaming, with companies like Disney and AT&T's WarnerMedia lowering their dependence on theaters for their major releases.

AMC's revenue was down nearly 80% in 2020 due to the pandemic. The company reported negative free cash flow over $1.3 billion for the year as it was forced to close its doors as the pandemic raged. Most of AMC's domestic theaters are now reopened, but it may take a while for ticket sales to return to pre-pandemic levels -- if they ever do.

AMC had about $6 billion of debt on the balance sheet at the end of 2020 and paid more than $300 million of interest on that debt throughout the year. The company wasn't profitable in 2019 before the pandemic hit because of those excessive interest payments.

It's possible that AMC will be able to wipe away a sizable chunk of its debt by taking advantage of its inflated share price and selling new shares. That will certainly buy the company time, but it doesn't solve any of its problems. The movie-theater business is probably not going to look the same as it did before the pandemic. AMC couldn't turn a profit then; it's unlikely to be able to turn a profit now.

Of course, the stock could do just about anything in the near term. But in the long run, I don't think it's worth much at all.

MicroStrategy

If you want to invest in Bitcoin, buy Bitcoin. Personally, I don't think the cryptocurrency makes any sense as an investment, but plenty of smart people disagree.

If you want to invest in Bitcoin while also owning a piece of a declining software company, you can invest in MicroStrategy. The company has been buying Bitcoin hand over fist, acquiring over 90,000 Bitcoins valued at over $5 billion today. It's even been issuing debt solely to fund its Bitcoin purchases.

MicroStrategy stock has surged this year, thanks to this Bitcoin-centric strategy, although it has shed some of those gains. One problem is that the underlying company isn't anything to write home about. Revenue was down slightly in 2020, and the company reported a small net loss. What's worse, revenue has been declining for years.

Issuing debt to buy Bitcoin will look like a genius move if the value of Bitcoin continues to rise in the long run. The fact that MicroStrategy's business isn't very compelling won't matter. But if Bitcoin is a massive bubble and the price collapses, it will look extremely foolish and could very well doom the company.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$95.66 (-3.56%) $-3.53
MicroStrategy Incorporated Stock Quote
MicroStrategy Incorporated
MSTR
$202.75 (-3.81%) $-8.02
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$12.03 (-8.03%) $-1.05

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

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