Please ensure Javascript is enabled for purposes of website accessibility

2 Risky Meme Stocks You Don't Want to Hold With 'Diamond Hands'

By David Jagielski - Jun 29, 2021 at 10:58AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Some stocks you can buy and forget. With Zomedica and ContextLogic, you'll want to keep a much closer eye on matters.

The term "diamond hands" has become common among a certain subset of retail investors. It refers to the idea of someone who holds on to an asset for the long haul, even amid volatility and negative press. And there is nothing wrong with holding investments for many years or even decades -- Warren Buffett is often quoted for having said that his preferred holding period for investments is "forever."

But while that strategy can work well with blue-chip companies that you can feel confident will be around for decades, it can be disastrous when applied to riskier investments. Two that fall into that latter category today are Zomedica (ZOM 2.09%) and ContextLogic (WISH 2.87%).

Man working from home reviewing a sheet of paper.

Image source: Getty Images.

Zomedica could be a huge boon to veterinarians ... or not

Any time you invest in a company that just made its first sale, you are taking on a massive risk. That's the boat Zomedica investors are in right now. It was only in March that the company announced the first commercial sale of its Truforma system, which veterinarians can use to run diagnostic tests. According to the company, its platform increases the accuracy of those tests. It also saves the data and analyzes it, helping transform the raw data into useful forms that vets can use to guide their treatment decisions.

While that all sounds great, that doesn't mean that a significant fraction of veterinary practices will adopt the platform. Buy-and-hold investors here could find themselves enduring a long period of poor results waiting for a payoff that never comes. Over the past 12 months, Zomedica has burned through $17 million in cash to fund its day-to-day operations. During that time, it has also issued $254 million worth of common stock. 

Although that will give it a bit of a buffer if it maintains its relatively low level of cash burn, that will be of little comfort if revenues don't start coming in. The good news is that investors may not have to wait all that long to find out where Zomedica is headed. The COVID-19 pandemic led to a surge in pet adoptions; 70% of U.S. households now own a pet (up from 67%). Veterinarians could soon become pretty busy, and if they decide that the Truforma platform is valuable to them, sales could soar. 

The risk, of course, is that it might not play out that way, and Zomedica's numbers in the near term could be underwhelming. If that's the case, then investors would be better off cutting bait quickly as opposed to hanging on to the stock. Zomedica's share price is up by more than 240% over the past 12 months (while the S&P 500 has risen by just 42%), so there is plenty of room for this healthcare stock to crater should things go poorly. 

ContextLogic offers e-commerce bargains ... eventually

ContextLogic, which owns e-commerce site wish.com, is generating plenty of revenue, so there's no doubt that consumers have been using the platform. The company's numbers have been impressive, with sales of $772 million for the period ending March 31 up 75% from the prior-year period. Unfortunately, its $128 million loss also doubled in size year over year. And since ContextLogic went public in December, its stock price has fallen by more than 25%. 

The reason I would be wary of investing in this company is that its marketplace is heavily dependent on China -- most of its merchants are based there. And that can be a big problem when it comes to logistics and quality. One of the biggest criticisms of the site is that delivery times for products purchased on it can run into weeks, or even months. In an era when Amazon offers same-day shipping and consumers are seeking out quicker deliveries from all of their retail outlets, that degree of slowness may seriously limit ContextLogic's market potential, even for the bargain-priced goods it features.

Also, according to data from the Organisation for Economic Co-operation and Development, the majority of counterfeit products come from either mainland China or Hong Kong. That may explain why wish.com's offerings are often priced so much lower than (apparently) comparable items sold on other sites.

While ContextLogic is raking in some great sales numbers right now, it may be hard to keep that going as users of the site grow frustrated with poor-quality products and ultra-slow shipping speeds. In addition, the company burned through a staggering $354 million in cash just in its last quarter, and that was only for its day-to-day operations, so shareholder dilution is a serious risk here. The company had cash and cash equivalents at the end of March of $1.6 billion -- that's about enough to last a year at its current burn rate (and that's just looking at operations).

ContextLogic faces serious challenges in the near term and over the long haul, so investors planning to buy this stock and forget about it could be in for a rude surprise when they check back in years down the road. This is not a company that has a guaranteed path to success. Investors should be extremely cautious with it.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Zomedica Pharmaceuticals Corp. Stock Quote
Zomedica Pharmaceuticals Corp.
ZOM
$0.34 (2.09%) $0.01
ContextLogic Inc. Stock Quote
ContextLogic Inc.
WISH
$1.79 (2.87%) $0.05

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.