It's a great time to be a long-term investor. Despite shedding over a third of its value in just over a month during the first quarter of 2020, the benchmark S&P 500 has enjoyed a historic bounce-back rally that's seen the index gain 97% since March 23, 2020.
But while the long term favors optimists, we know that not every stock can be a winner. As we push headlong into August, the following five ultra-popular stocks all have attributes that make them highly avoidable.
Movie theater chain and chief meme stock AMC Entertainment (AMC -8.81%) is a liable to be a fixture on this monthly list until it either resolves its operating inefficiencies or retraces another 85% -- whichever comes first.
The premise for avoiding AMC is simple: The math doesn't make sense. Although AMC was able to raise in the neighborhood of $2.2 billion in capital, it's still contending with over $5.4 billion in debt, as of the end of March, has $473 million in deferred rental obligations, and is dealing with multiple billions of dollars in remaining lease obligations. With over 513 million shares outstanding, AMC has effectively capped its authorized allowable share issuances, and will therefore be required to pay back the debt it owes with cash, which it simply doesn't have. The value of the company's 2026 and 2027 bonds, totaling over $1 billion in outstanding debt, combined, have been plunging of late, signifying that bankruptcy remains a possibility.
In addition, AMC's core business continues to face headwinds that won't go away. AT&T's Warner Bros. recently announced plans to simultaneously release 10 new movies to HBO Max and theaters on Day 1 in 2022. Warner Bros. also noted that exclusivity for some films will be halved to 45 days from the traditional period of 90 days. Couple this with a relatively steady 19-year drop-off in movie theater ticket sales, and you'll see that AMC's operating woes are very serious.
The icing on the cake was a tweet from CEO Adam Aron following AMC's annual shareholder meeting that effectively denounced many of the nefarious short-selling claims by noting that he and the board are "unaware of any information validating these theories." This is all more than enough reason to keep your distance from AMC in August.
Despite going public last week, online investing app Robinhood Markets (HOOD -3.20%) is a company that investors should avoid like the plague in August.
On the bright side, extreme volatility for stocks in 2020, coupled with a soaring cryptocurrency market in the early 2021, has fueled trading activity on Robinhood. According to its prospectus, the company has 18 million funded accounts managing $81 billion in total assets. Robinhood also saw its sales more than triple last year to $959 million, with its full-year loss in 2019 flipping to a $7 million full-year profit in 2020.
On the other hand, retail customers aren't playing a big role in Robinhood's underlying business, even if the platform is built around promoting retail interests. The company's prospectus notes that 75% of the $959 million in revenue collected last year was derived from selling order flow to market makers. Citadel Securities alone accounted for 34% of Robinhood's sales. This is a highly concentrated amount of revenue in only a few market makers, which leaves Robinhood exposed should any of these top customers take their business elsewhere.
What's more, Robinhood is facing significant backlash from retail investors who feel slighted by the company's trading restrictions that were imposed during the short-squeeze bonanza in January and February. Even though the restrictions Robinhood put in place had to do with meeting liquidity requirements for brokerages, those excuses haven't sat well with retail investors. Let Robinhood's PR nightmare be someone else's problem.
Osprey Bitcoin Trust
I may not be a fan of the world's largest cryptocurrency by market cap, Bitcoin (BTC -1.43%), but I recognize there are countless ways to invest in digital currencies, some of which are better than others. Buying Osprey Bitcoin Trust (OBTC 1.61%) might be one of the worst ways to put your money to work in Bitcoin.
Like Grayscale Bitcoin Trust, Osprey Bitcoin Trust purchases and holds Bitcoin. It's designed to be a way of buying a Bitcoin tracking security without having to purchase actual Bitcoin on a cryptocurrency exchange. As of July 30, Osprey owned approximately 2,835 Bitcoin, with a market value in the neighborhood of $120 million.
Despite this valuation method being straightforward, Osprey is valued at an absurd premium of 21% to its Bitcoin holdings. In other words, instead of purchasing Bitcoin for, say, $42,000 a token on a crypto exchange, Osprey is being valued as if its portfolio contained Bitcoin at nearly $51,000 a token. That makes no sense.
To boot, Bitcoin has a long history of protracted bear markets, which could significantly weigh on interest and cash inflow into the Osprey Bitcoin Trust. It's definitely worth avoiding in August.
A fourth ultra-popular stock to avoid like the plague in August is clinical-stage biotech company Cassava Sciences (SAVA -5.83%). Like AMC, Cassava has found itself on this list quite a few times in recent months.
Cassava's area of focus is Alzheimer's disease, which impacts more than 6 million Americans, and is a figure that continues to rise with each passing year. I would love for Cassava Sciences and its leading experimental drug simufilam to be successful. However, I'm also a realist and understand that there are few ailments with a lower late-stage clinical success rate than Alzheimer's.
On the positive side, Cassava announced a statistically significant improvement in cognition (18% cognition score improvement from baseline) for patients who'd completed a nine-month, open-label clinical study. The company also released data showing statistically significant improvements in biomarker data for Alzheimer's patients who'd been treated for at least six months.
But for roughly two decades, we've watched as behemoths like Eli Lilly and Merck, and relatively unknown biotech stocks, like vTv Therapeutics, failed in clinical studies with their respective Alzheimer's treatments. Early and mid-stage promise is not uncommon, but larger-scale studies have been a nearly surefire fail for 20 years. Fighting against the odds, Cassava Sciences has the look of a stock worth avoiding in August.
The fifth ultra-popular stock to steer clear of in August is electric vehicle (EV) manufacturer Nikola (NKLA -6.32%).
Investors' interest in Nikola has to do with the undeniable opportunity EV manufacturers have at their doorstep. In an effort to curb carbon emissions and climate change, we're likely going to witness a multi-decade consumer and enterprise vehicle replacement cycle. That's tens of millions of vehicles being sold each year and a wide-open market just waiting for market share to be grabbed.
The issue for Nikola is that it's been contending with one PR nightmare after another. Following a September report from noted short-side firm Hindenburg Research that alleged Nikola was a "fraud," the Securities and Exchange Commission opened a probe into the company. An independent review found that some of the statements made by founder Trevor Milton regarding presells weren't entirely accurate.
This past week, the next shoe dropped, with U.S. Department of Justice indicting Milton, who stepped down from his role with the company last year, on three charges that pertain to misleading investors. While these charges don't specifically affect Nikola's day-to-day operations, they undermine trust in a company that's trying to build itself from the ground up. Starting an EV company is costly, and Nikola may not have the capital needed to be a successful player, especially after allegedly misleading its investors. That makes it worth avoiding like the plague.