A stronger economy next year and a return to pre-pandemic norms could help some businesses, but it can also make things a bit more challenging for others. With interest rates potentially on the rise in 2022, the equity markets may soon be less attractive options than they are right now for investors.
As bond yields rise, investors will be able to earn higher returns without having to invest in a risky and volatile stock market that's trading at all-time highs and due for a correction. Plus, companies carrying lots of debt will likely incur greater interest expenses, worsening their bottom lines in the process.
Two stocks that I would steer clear of heading into next year include High Tide (HITI +2.21%) and AMC Holdings (AMC +0.41%). This year, they've both outperformed the S&P 500 by wide margins, but that pattern isn't likely to continue in 2022.
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1. High Tide
Cannabis retailer High Tide isn't a profitable business, and likely won't be for some time. Over the trailing 12 months, it has reported 152 million Canadian dollars in revenue and losses totaling CA$32 million. The company's gross margins of 36% aren't bad, but they're likely to get a whole lot worse.
That's because High Tide recently launched a "discount club loyalty plan" that will accelerate a strategy focused on value. While it will help attract more customers into its stores and likely boost overall market share, it will come at the cost of smaller margins. The company said in an Oct. 20 press release that as of that day, its retail pot shops "will begin to offer steep club discounts on cannabis products." This move -- to try and gain market share -- looks risky.
Cannabis companies have aggressively pursued growth at all costs, and the danger is that for investors, a lack of profitability and positive cash flow can translate into significant dilution.
Although High Tide has more than doubled this year and soared past the S&P 500's gains of 25%, there could be some tough times ahead for the company in 2022 as it deploys what looks to be a dangerous strategy focused primarily on revenue growth.
2. AMC Holdings
Entertainment company AMC is an even riskier buy, with its stock up 2,000% this year and overdue for a significant sell-off.
A big risk relating to the stock right now is its wild volatility. Investing in a meme stock and what's a popular trend right now can lead investors onto a wild roller-coaster ride. All you need to do is look at the stock's 52-week range of $1.91 to $72.62 to see that while AMC has undoubtedly made some people rich, others are likely regretting their decision to jump aboard the hype. That kind of broad price range might make sense for a hot new tech stock that just went public, but it's not the price movement you would expect to see for a struggling theatre operator.
And the more concerning issue is that the business itself isn't in terribly great shape. Sure, AMC is sitting on $1.8 billion in liquidity, but the company is burning through money and has corporate borrowings totaling $5.5 billion. And although for the period ending Sept. 30 there was improvement, with AMC's revenue of $763.2 million coming in at more than six times the $119.5 million it reported a year ago, that still wasn't enough to pull it out of the red. With a net loss of $224.2 million, the company still has a long way to go to break even. Meanwhile, interest expenses of $88.7 million on its corporate borrowings represented 11.6% of revenue this past quarter. That's a dangerously high rate -- especially in a low-interest rate environment.
Until AMC starts putting significant cash toward paying down its debt, I'd stay far away from this stock. Even before the pandemic, the company wasn't consistently posting a profit. It was a risky buy before, and now with a higher debt load, it is an even more dangerous one to hold in your portfolio.
