Most people may associate the fear of missing out (known as FOMO) with their social lives, but it applies to investing as well. Hearing about popular stocks may lead some to capriciously picked-up shares without doing the proper investigating in an attempt to avoid missing out on the next big things. But it doesn't take an investing wizard to recognize that this is hardly a sound approach.
Investors may want to think twice before adding these names to their portfolios: Lithium Americas (LAC), Mullen Automotive (MULN 7.06%), NXP Semiconductors (NXPI 3.18%), Rivian (RIVN 2.84%), and Sunrun (RUN 2.19%). Here's why.
1. Lithium Americas
Enthusiasm for electric vehicles (EVs) continues to rev the engines of growth-oriented investors, but interest in this area transcends the EV manufacturers; investors are also paying close attention to EV-related stocks like those focused on lithium production. It's unsurprising, therefore, that Lithium Americas is gaining popularity right now.
In the pre-revenue phase of its development, Lithium Americas is garnering attention from growth investors, who foresee returns when the company commences operations at its two projects. But bringing sizable mineral production operations to fruition is hardly an easy endeavor.
The company has faced considerable opposition from local residents in Nevada, where the Thacker Pass project -- characterized by some as one of the largest lithium deposits in the world -- is located. Currently, litigation is pending regarding the development of the project, which some locals oppose due to environmental concerns. The company, which has received the permits necessary for construction to start, hopes to begin initial construction activity at Thacker Pass in 2022, but the pending lawsuit can certainly delay this timeline -- if not altogether.
Should Lithium Americas receive an unfavorable ruling in the litigation, it would represent a significant speed bump in the company's growth trajectory.
2. Mullen Automotive
EV manufacturer Mullen Automotive is working on production of its initial vehicle the Five, an electric SUV crossover, that the company hopes to first deliver to customers in Q4 2023. But unlike other EV manufacturers, the company is also focused on developing its own solid-state battery, which it contends will have a 50% less cost per watt-hour and five times greater energy density than conventional lithium-ion batteries. Stoking investors' excitement, Mullen announced last month results of its solid-state battery testing that exceeded expectations.
Investors must appreciate, however, that bringing solid-state batteries for use in EVs is no easy feat; in fact, it's never been done before. While solid-state batteries offer various advantages over traditional lithium-ion batteries, there are imposing technical challenges standing in the way of companies bringing production of these batteries to scale. In other words, Mullen Automotive has a lot of road to travel before it shows that its solid-state batteries are ready for prime time.
3. NXP Semiconductors
From appliances to used cars, the effect of the semiconductor shortage is being felt across a wide swath of industries. Consequently, investors are turning their attention to semiconductor stocks such as NXP Semiconductors, whose products are used in a wide swath of applications including automotive, smart home, and healthcare.
Over the past three months, shares of NXP Semiconductors have risen more than 4% while the S&P 500 has dipped about 4%. Adding to investors' interest in the company is the fact that rumors are swirling that Samsung is eyeing it as an acquisition target.
Investors predicating an investment in NXP Semiconductors solely on the speculation that Samsung will acquire it -- and at a premium to its current share price -- is hardly wise. You don't need to look far and wide at the business world to find examples of acquisition exuberance that eventually lost steam -- I'm looking at you, Elon Musk and Twitter.
4. Rivian Automotive
In the race of which company is garnering the most interest among EV investors, it seems as if Rivian is constantly trading pole positions with Nio and Tesla. Unlike the other EV makers, Rivian is exclusively focused now on electric pickup trucks -- something which has charged up drivers' interest. During its Q1 2022 earnings presentation, for example, Rivian noted that it had secured more than 90,000 reservations for its R1S and R1T vehicles, and management reaffirmed guidance that it expects to produce 25,000 vehicles in 2022.
Rivian, however, is not immune from growing pains. Several fires have been reported over the past few months at the company's production facility in Illinois, leading investors to wonder if the company is speeding ahead too fast in order to achieve its 2022 vehicle production forecast. In addition, investors must remember that Rivian isn't the only driving ahead in the race to grab market share in electric pickup trucks. Ford is positioning itself as a formidable competitor with its F-150 Lightning pickup, and Stellantis expects to launch an all-electric version of its popular RAM pickup in 2024.
5. Sunrun
With energy prices soaring lately, some investors seem to believe that renewable energy stocks are poised to have their day in the sun. It's no wonder, therefore, that Sunrun's stock is up nearly 15% over the past month. In particular, solar investors heralded President Biden's announcement this week that he was invoking the Defense Production Act to spur domestic manufacturing of solar panels; on that day, Sunrun closed 6% higher.
It's possible that the invocation of the Defense Production Act leads to a boon for Sunrun, but investors have to be mindful of the bottom line as well as the top line. And regarding the bottom of the income statement, it seems there are plenty of clouds.
RUN Revenue (Annual) data by YCharts.
Over the past five years, Sunrun has grown sales 255%, but it has failed to recognize comparable earnings growth. The cash flow statement has also represented a sore spot for investors, as the company hasn't reported positive operational cash flow since 2013. Between the lack of profitability and weak cash flow, it wouldn't be surprising to find the company resort to raising capital through the issuance of equity in the future, resulting in shareholder dilution.
Be prudent prior to picking up these stocks
Granted, any one of the above-mentioned stocks may end up providing sizable returns to investors -- but that's a big "may." Any and all of these stocks also have the potential to flounder over time. So it's critical that interested investors dig in deep and appreciate the inherent risks of these investments, balancing the hype that surrounds them with clear understanding of the chance that the stocks fall and don't recover.
