Knowing which stocks to avoid can be as important as knowing which ones to buy. No one wants to get stuck with a bad stock, contemplating whether to dump it or hang on to it and wait out a recovery. But for stocks that aren't likely to recover, there are usually plenty of warning signs that investors can watch for in their research.
A couple of stocks that I would be very cautious with right now are Novavax (NVAX +1.43%) and Rivian Automotive (RIVN +0.66%). While there was once lots of hype behind them, now there's anxiety -- and for good reason.
NASDAQ: NVAX
Key Data Points
1. Novavax
Novavax's COVID-19 vaccine is approved for use in many countries, with Taiwan being the latest (on June 23) to grant it Emergency Use Authorization (EUA). But one country that hasn't yet granted authorization is the U.S. And it's been three weeks since an advisory committee from the Food and Drug Administration (FDA) recommended granting an EUA for the vaccine.
The FDA doesn't have to follow the guidance of an advisory committee, but Novavax investors are certainly hopeful that it will. It has been more than a year since the agency last authorized a new COVID-19 vaccine (Johnson & Johnson's). If Novavax's vaccine does get the OK, the stock will likely take off on the excitement. But even if that does happen, I'm not sure the bullishness will last.
One particular concern I have is about the company's operating cash flow:
NVAX cash from operations (quarterly). Data by YCharts.
Even though Novavax has begun generating revenue from its COVID-19 vaccine in other parts of the world, it has still been burning through cash. Obtaining an EUA for the U.S. market could certainly help, but then there's the question of how much of a boost that would give its business and for how long; COVID-19 hospitalizations in the U.S. are down more than 70% since the start of the year, and concerns around the pandemic appear to be subsiding. The demand for the vaccine simply might not be all that strong.
Novavax has close to $1.6 billion on its books, so there's little doubt it can keep the lights on for the foreseeable future. But for growth investors, there needs to be something more to offer than just staying in business. And over time, the continual cash burn can lead to stock offerings and dilution.
Other products in Novavax's pipeline (e.g. NanoFlu and ResVax) that are in phase 3 trials could still be a year or more away from generating revenue -- assuming, of course, that they end up obtaining approval from the FDA.
With nothing but hopes of an EUA for the U.S. market in the wings for its COVID-19 vaccine right now, there may not be enough here to drive the stock's value up. And if the EUA doesn't come, the sell-off could turn into a downright collapse.
Down 62% year to date, Novavax's stock has fared far worse than the S&P 500, which has declined by 20%. And with no other products it can rely on to help turn things around soon, Novavax could continue its decline as the year goes on.
NASDAQ: RIVN
Key Data Points
2. Rivian
Electric vehicle (EV) maker Rivian has suffered an even steeper decline than Novavax; its shares have nosedived more than 72% this year.
There were hopes when the stock went public last year that it could be another Tesla. And it still might be. Many investors doubted Tesla in its early days, and it has turned out to be an incredible success story. But the EV market has also become more crowded since then. Not only is there Tesla, but Ford, Volkswagen, and many other companies are making EVs as well. Those are some big competitors with plenty of money behind them with which Rivian will need to compete.
And the problem is that its financials aren't great. During the first three months of 2022, Rivian reported $95 million in revenue but nearly $1.1 billion in operating expenses and a similar amount of cash burn from its day-to-day operating activities. Its cost of sales of $597 million was higher than revenue as the company's production lines are designed for higher volumes than the 2,553 vehicles it manufactured during the period. And the company warned that it will continue to generate a gross loss.
Even if Rivian does eventually generate the demand necessary to post a positive gross profit and cover operating expenses to land in the black, it could take a very long time before that happens, if ever. In the meantime, investors will likely see more dilution. While it could be tempting to hope that it could be the next Tesla, buying shares of Rivian would be nothing short of a gamble at this point.
