For more than a year, the stock market has been on a historic run. Even though all stock market crashes and corrections are eventually erased by a bull-market rally, gains of as much as 88% in the benchmark S&P 500 since hitting a bear-market bottom on March 23, 2020 have far exceeded even the most optimistic expectations.
But there's another reality investors must face: Not every stock can be a winner.
While analysts are known for their optimism, there are three exceptionally popular stocks that are expected to lose anywhere from 53% to as much as 79%, based on Wall Street's one-year price targets. In other words, Wall Street believes these are the stocks to avoid.
AMC Entertainment: Implied downside of 53%
Interestingly, most of the heavily short-sold stocks that Reddit traders/retail investors piled into earlier this year are now below Wall Street's 12-month price target following a significant retracement. That's not the case for movie theater chain AMC Entertainment (AMC 2.57%). Even though AMC's price target has risen modestly over the past couple of months, the consensus on Wall Street is that it'll decline by up to 53% over the next year.
AMC optimists really have only one catalyst to lean on, and that's the hope it undergoes another short squeeze. Short interest has been rising pretty steady over the past two months, and daily volume has tapered from where it was during the height of its volatility in late January and throughout much of February. Unfortunately, focusing solely on a short squeeze has left optimists blind to AMC's numerous operating and balance sheet faults.
For instance, the movie theater industry has gone nowhere in nearly two decades. Ticket sales and inflation-adjusted box office revenue have each declined by 22%. There's no question that the rise of streaming is going to pilfer some of AMC's would-be customers in the years to come.
But far more worrisome is AMC's debt levels. Despite CEO Adam Aron noting that the company had enough cash to survive through 2022, the company's operating performance and balance sheet suggest it's in dire straits. AMC is on pace to pay more in interest expenses in 2021 than it's ever generated in cash from operations in any given year -- even in its best years. Without issuing hundreds of millions of new shares and diluting its investors, AMC's long-term survival is a dubious proposition.
In short, I wholeheartedly agree with Wall Street's skepticism.
Takung Art: Implied downside of 79%
There's arguably no popular stock with greater implied downside at the moment than Hong Kong-based Takung Art (TKAT). Takung, which is the top-performing stock on a year-to-date basis (up 1,523%), ended this past week at $24 a share. However, Wall Street's 12-month consensus price target of $5 suggests downside of as much as 79%.
Takung Art has had two catalysts in its sails. To begin with, it's been sent to the heavens on the expectation that it'll start catering to non-fungible tokens, or NFTs, on its platform. An NFT is a digital certificate of authenticity stored on blockchain for a piece of digital art. Since blockchain is both immutable and transparent, NFTs are viewed as one of the safest ways to buy and sell artwork. With Takung operating an online platform that allows artists and art dealers to sell or trade artwork, it presumably wouldn't be difficult for the company to incorporate NFTs into its game plan.
Second, the company has benefited from its exceptionally low float of around 9 million shares. Having so few shares available for trade can allow a small number of shares to move the company's stock higher or lower in a hurry.
The problem for Takung Art is that its online platform has been in decline for years. In 2020, the company brought in less than $4.6 million in sales. By comparison, it was generating more than that every quarter back in 2016. With little substance behind its speculation-driven run-up, Wall Street expects this stock to get clobbered.
GameStop: Implied downside of 74%
Lastly, as if there was any doubt, video game and accessories retailer GameStop (GME -2.39%) is on Wall Street's naughty list. Even though the consensus price target for the company has tripled since the year began, it still implies that GameStop will decline by up to 74% over the next year.
Like AMC, GameStop was fueled by the Reddit craze earlier this year. In fact, GameStop is credited with starting it all in mid-January. At the time, no publicly traded company had a higher short interest relative to its float. This made it a logical short squeeze candidate.
However, the dynamics that made a sustained short squeeze possible in GameStop back in January no longer exist. Short interest has come down considerably, and higher daily trading volume would allow short-sellers to exit their positions with relative ease. In other words, while a short squeeze is always possible, a sustained squeeze is extremely unlikely.
The bigger concern is GameStop's poor operating performance. On one hand, e-commerce sales catapulted higher by 191% in its previous fiscal year. On the other hand, total sales still declined by more than 21%. Comparable-store sales dipped 9.5% in fiscal 2020, with the company also shuttering 12% of its locations.
For two decades, GameStop's brick-and-mortar operating model worked beautifully. But the fact of the matter is its management team waited too long to shift into the digital-gaming arena. As a result, GameStop is now playing catch-up. It could be years before the company has backpedaled its way into the profit column.