The market may not thrive this year. Impending interest rate hikes meant to curb rampant inflation obviously don't help the bull case, but it's difficult to deny earnings are bouncing back from their pandemic lull. By and large, it doesn't seem stocks are in serious trouble right now with the worst-case scenario being a bit of temporary turbulence.
There are a handful of stocks, however, that pose considerably more risk to shareholders than the average ticker does at this time. If you currently own -- or are thinking about buying -- any of these three names, just make sure you fully understand their unique, inherent risks.
GameStop
One of the original meme stocks, GameStop (GME 0.40%) shares soared in early 2021 in what looked like a combination of a short squeeze and speculation on that short squeeze. The stock remained volatile for the remainder of the year but mostly held onto its gains ...
... at least until now. The stock's 50% pullback from November's high dragged shares to new multi-month lows, and there's still more meme-stock hype to be wrung out of this stock. More to the point, without any clarity regarding the company's turnaround plan, investors are prone to lose interest in supporting this stock's still-lofty price.
Image source: Getty Images.
Some people will rightfully point out that activist investor, GameStop chairman, and major GameStop shareholder Ryan Cohen has said he intends to remake the video game retailer into a proverbial Amazon of the video game market. The company's also wading into the NFT (non-fungible token) arena where it will facilitate the buying and selling of digital images, videos, and even sounds.
The problem is, Cohen effectively took control of GameStop in the middle of last year, and there's still no discernible plan as to how the game retailer is going to shake up its industry. It's still mostly reliant on a brick-and-mortar presence that, as game downloads continue to grow, is less and less important to gamers. Despite the broad economic rebound, the company's revenue through the first three quarters of fiscal 2021 was 12% lower than where it was at the same point in 2019. And while NFTs are an interesting development, they're also an arbitrary, unproven concept with difficult-to-define value.
GameStop stock's sizable slide over the course of the past three months suggests investors are starting to sense there's no actual, reliable, and believable turnaround plan in place.
Alcoa
Anyone that keeps tabs on the materials sector may already know metal prices -- aluminum in particular -- are soaring. Indeed, aluminum's spot prices just hit a record high of around $1.96 per pound, boosted by a combination of fresh demand and waning supply. Shares of aluminum supplier Alcoa (AA 3.09%) are soaring too, setting a fresh post-split high of $73.72 just this week. Forecasters expect the supply shortage to linger well into this year with the costs of the energy needed to smelt and refine the metal still too high to justify expanding its output. Many production plants are also still shuttered due to COVID.
So why, pray tell, would an investor want to steer clear or get out of a stock that's performing so well?
Basic industrial metals are a tricky business. This is particularly true of metals that require a massive amount of energy-consuming heat (like aluminum) to work with. Nothing cures aluminum supply shortages like irresistible prices, and at the same time, nothing works against sky-high energy costs that force smelters and refiners to look for cheaper alternative means of producing industrial-grade metal materials.
In other words, the aluminum business is a highly cyclical one, yet few people ever see the ebbs and flows coming. The 1,200% rally of Alcoa shares from its early 2020 low may be an "as good as it gets" moment for a long, long while.
Dillard's
Finally, add department store chain Dillard's (DDS -1.44%) to the list of stocks that could sabotage your portfolio.
To its credit, Dillard's is digging its way out of the hole the pandemic put it in. Its comparable retail sales were up 48% year over year in the third quarter, driving an even bigger improvement on its bottom line and extending an impressive growth streak. Expect more growth going forward too as consumers slowly but surely ease back into their shopping habits established before the coronavirus contagion took hold. Dillard's stock has rallied too, from 2020's low near $24 per share to the current price of $261, and it was trading above $400 as recently as November. That's incredible.
The problem? The department store business was already in a steep decline well before the pandemic. According to data from the Census Bureau, the United States department store industry's revenue peaked at $231 billion back in the year 2000 and has steadily fallen ever since. In pre-COVID 2019, this segment of the retail market only generated $135 billion worth of business. Nothing about this headwind has changed in the meantime.
Well, there's considerably less competition now, to be clear, and Dillard's has embraced the internet rather than continuing to lose business to online competitors. The fact of the matter is, this company is still heavily reliant on brick-and-mortar stores that are operating in an ever-shrinking market, and the stock's still somehow closer to last year's record highs than it is to its pre-pandemic lows. Something's apt to give sooner than later, once shareholders start asking more serious questions about the company's long-term plans.
