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2 Risky Stocks I Wouldn't Buy With Free Money

By David Jagielski – Oct 31, 2021 at 6:30AM

Key Points

  • Zomedica has an unproven business that has generated little revenue this year.
  • Digital World Acquisition is a SPAC that has soared in popularity as it looks to take Donald Trump's new company public.
  • Neither stock is a safe buy despite being popular with retail investors.

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Sometimes the safest decision is to hold cash and wait for an opportunity.

Even if I were to win the lottery or come into some money, that doesn't mean I would be willing to use that cash on risky investments that could offer high returns in the short term. And if someone wants to build wealth over the years, they need to be careful to protect their money and make the most of it. That means avoiding risky investments.

There are two stocks that despite their popularity with retail investors, I wouldn't suggest investing in, even if you had money you could afford to gamble with: Zomedica (ZOM -3.71%) and Digital World Acquisition Corp (DWAC -4.66%).

Two people using a laptop and reviewing documents.

Image source: Getty Images.

1. Zomedica

Veterinary health company Zomedica is a business that's in its very early stages. But that hasn't stopped retail investors from piling money into it; shares of the company are up more than 570% over the past year (the S&P 500 has risen by just 32% during that time). And while Zomedica may not turn out to be a bad buy, there are two things to be wary of: A company that generates little to no revenue and that spends excessively. This business falls into both of those categories.

In Zomedica's case, the company only began selling its flagship Truforma platform, which helps veterinarians run tests on animals more efficiently than other diagnostic products, earlier this year. But despite announcing the first commercial sale of the platform in March, revenue remains low; for the six-month period ending June 30, the company generated just $29,817. Zomedica says it "had only limited sales activity in the first and second quarters of 2021." There's obviously time for the company to prove that Truforma will be a big seller, but it's nowhere near that stage just yet. 

That hasn't prevented the company from spending -- lots. It has been adding to its salesforce this year, and its selling, general, and administrative expenses of more than $8.5 million over the first six months of 2021 are more than double the $3.1 million the company spent a year ago. And the company's financials don't really explain much of the significant jump in costs beyond saying that the increase primarily was related to increases in share-based compensation.

Exacerbating the issue is that on Oct. 1, Zomedica announced it would be acquiring Pulse Veterinary Technologies (PulseVet) for $70.9 million. PulseVet, Zomedica says, is a "world leader in electro-hydraulic shock wave technology" which treats veterinary patients. However, the company offers no sales numbers or projections for how it will help Zomedica. It does say that it will complement the company's Truforma platform and accelerate Zomedica's overall growth. 

Rather than focusing on first proving that the Truforma platform is popular with veterinarians and in demand, Zomedica is already buying a company that it believes will complement it. It's a baffling move and one that I'm skeptical about, especially given the lack of financial details. There are simply too many red flags with Zomedica to make this a stock worth buying today. Even with a pit of money, there are still plenty of better growth stocks to spend the cash on than Zomedica.

2. Digital World Acquisition Corp

One stock that may be even riskier than Zomedica is Digital World Acquisition Corp, a special purpose acquisition company (SPAC). Last week, former U.S. President Donald Trump announced he would be launching a new social media platform, "Truth Social," and his new company (Trump Media & Technology Group) will become public through a merger with Digital World Acquisition Corp. Shares of the SPAC skyrocketed on the news, jumping from less than $10 to more than $100 within a week.

SPACs are risky because the deals can fall apart, and often the projections for how a company will perform are exaggerated. While the initial press release didn't outline any such projections, a new social media company would face big obstacles in its growth. Two of the biggest are Facebook and Twitter, social media platforms with millions (and in Facebook's case, billions) of active users that would make it difficult for any new competitor to try to steal market share away from them. While a new social media platform endorsed by Trump could be popular with some of his most loyal followers, it's hard to see the long-term growth potential beyond that.

With Digital World being a SPAC and also tied to Trump, this could be the mother of all meme stocks. Throw a questionable social media platform into the mix, and you've got a stock that I would never even dream of buying due to the risk. Unless you're willing to gamble with your money, you probably shouldn't either, at least not at this stage when there is no hard financial data to support an investment decision in this business.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, 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 Facebook and Twitter. The Motley Fool has a disclosure policy.

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