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3 Overhyped Stocks That Could Crash

By Will Ebiefung, Jon Quast, and Keith Noonan – Aug 13, 2021 at 8:50AM

Key Points

  • Emotions can be a powerful driver of investment decisions.
  • Sometimes hyped-up stocks can deliver outstanding returns in the short term, but it won't last.
  • Don't be left holding the bag.

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Don't let the fear of missing out sink your portfolio.

Hype or fundamentals? It's an age-old question, especially for less-experienced investors. And while the performance of Robinhood Markets (HOOD 1.22%), AMC Entertainment Holdings (AMC), and Carnival (CCL 0.30%) (up year to date by 26%, 1,440%, and 8%, respectively) shows that speculation can win in the short term, these companies are unlikely to maintain their solid returns because of their poor fundamentals.

Keep reading to find out why. 

Robinhood

Will Ebiefung (Robinhood): Commission-free trading app Robinhood has taken the stock market by storm, helping make equity investing mainstream among millennials. Some of that hype might have bled into its share price, which has jumped 26% since its July initial public offering at $38. But despite the excitement, Robinhood looks unlikely to maintain its momentum because of its weak economic moat and eye-watering valuation.

Man covers his face in front of crashing stock chart

Image source: Getty Images.

Popularized by investing legend Warren Buffett, the term "economic moat" refers to a company's ability to maintain a competitive advantage over rivals, which helps ensure industry-leading growth. Robinhood rapidly gained market share by offering commission-free trading. But now that competitors like Charles Schwab's (NYSE: SCHW) TD Ameritrade and Morgan Stanley's (NYSE: MS) E*Trade have copied this feature, Robinhood's edge has weakened. 

The company also faces pressure from smaller rivals like privately held Webull, which targets the millennial demographic with its user-friendly mobile app. According to Bloomberg, Robinhood lost customers to this upstart after outages and system failures in 2020. 

That said, Robinhood is a fast-growing company with net revenue soaring 245% to $959 million in 2020. But investing is about betting on the future, not the past. And it is unclear if Robinhood can maintain its rapid expansion now that rivals are copying its business model. With a market cap of $40 billion, the stock trades for a price-to-sales multiple of over 41, pricing in a tremendous amount of growth that will be increasingly hard to maintain. 

AMC Entertainment

Keith Noonan (AMC Entertainment): Investors who bet against AMC at the beginning of the year have had a rough go so far. Even after a pullback from recent highs, the theater chain's stock is up roughly 1,440% across 2021.

The company now has a market capitalization of roughly $16.8 billion, up from $500 million a year ago. That would be an incredible rally even for a company with its business firing on all cylinders and a clear path to more strong performance. For those keeping score, it doesn't look like AMC checks either of those boxes. 

It's no secret that the theater business has been hit particularly hard during the pandemic. AMC has picked up market share as smaller theater chains have permanently closed or been acquired, but it's an unfortunate reality that the market outlook has never been worse. Big-budget, tentpole releases from Disney (NYSE: DIS), Comcast's (NASDAQ: CMCSA) Universal Pictures, and Discovery's (NASDAQ: DISCA) Warner Bros. being available through streaming distribution on the same day they release in theaters signals what might be an irreversible decline in the movie theater biz. 

But while AMC's outlook remains dismal, the situation with the stock remains super-interesting, and it's understandably still generating big hype. It's a meme stock favorite, and its popularity with highly enthusiastic retail investors has helped the company's valuation surge to levels that are hard to justify by most conventional metrics. 

To be fair, this isn't a traditional situation or a traditional stock. AMC Entertainment is a phenomenon, and it wouldn't be wise to bet against the stock climbing in the near term. The company's share price routinely makes substantial moves that have little to do with fundamentals or major business developments. On the other hand, the reality of the fundamentals will probably start to drag on AMC at some point, and I wouldn't want to be holding the stock if that tide starts to turn. 

Carnival 

Jon Quast (Carnival): You might be surprised that I'm calling cruise ship operator Carnival an overhyped stock. After all, the price per share is still down 65% from its three-year high as of this writing. And it's down 26% from its 52-week high. How can something down that much be overhyped? It's because the price per share doesn't tell the whole story.

Through no fault of its own, Carnival couldn't operate once the pandemic began, and it's still struggling to get anything going. And yet, the company has bills to pay. Over the past year and a half, it's had no choice but to issue new shares and take on a lot of debt to keep the lights on. These financing decisions aren't captured by just looking at the stock price. But these things are reflected by Carnival's enterprise value: the total value of the company right now.

CCL Chart

CCL data by YCharts

The chart above shows that while Carnival's stock price is way down, its enterprise value is actually comparable to what it was before the pandemic. In other words, the market is saying Carnival's business is worth roughly the same right now as it was back in 2019 when times were good for cruise companies. I disagree with the market on this one, and it's why I'm calling Carnival stock overhyped.

Looking forward to a best-case scenario, I don't see any reason Carnival's business should be better than in 2019 anytime soon. After all, it's not like the cruise ship industry was growing by an impressive rate before the pandemic. That said, it was steady and profitable. And its profitability made Carnival a decent investment back then because management was buying back shares and paying a juicy high-yield dividend.

In 2019, Carnival generated operating income of almost $3.3 billion. And it ended that year with just under $10 billion in long-term debt, which was manageable. As of the most recent quarter, however, Carnival had almost $26 billion of long-term debt on the balance sheet. Simply put, even if Carnival got back to full strength today and was generating substantial cash flow, it would take years before it could repair its balance sheet and return to being the company it once was. Remember: Lenders always take priority over shareholders. Therefore, there probably won't be any share repurchases or dividends for some time. 

This is the problem that I see for Carnival investors today. I'm not suggesting the company is doomed. But it's going to be a long road to even justify its current enterprise value. And generating market-beating returns on top of this seems like too big a challenge to overcome.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Carnival, Charles Schwab, Comcast, and Discovery (C shares). The Motley Fool has a disclosure policy.

Stocks Mentioned

Carnival & Plc Stock Quote
Carnival & Plc
CCL
$10.00 (0.30%) $0.03
AMC Entertainment Stock Quote
AMC Entertainment
AMC
$8.17 (%)
Robinhood Markets Stock Quote
Robinhood Markets
HOOD
$9.99 (1.22%) $0.12

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

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