For some, Halloween provides a way to let their imagination become reality -- at least for a day. For others, it's a day of ghouls, goblins, and ghosts, with the intent of putting a little scare in those seeking candy. But for the stock market, Halloween represents just another day in 2022 of scaring the daylights out of investors.
Since the year began, the timeless Dow Jones Industrial Average, broad-based S&P 500, and widely followed Nasdaq Composite, have all plummeted into a bear market. The Nasdaq has been the biggest loser, with a peak-to-trough decline (since its November 2021 high) of 38%.
Image source: Getty Images.
On one hand, history conclusively shows that putting your money to work in high-quality stocks during bear markets is a genius move. Eventually, every stock market correction and crash throughout history has been fully recouped (and some) by a bull market rally.
On the other hand, not every stock is going to be a winner -- even at a perceived-to-be "discounted" price. Halloween serves as a needed reminder that some ultra-popular stocks are more trick than treat. Here are three perfect examples.
Tesla
There's arguably not a more-loved electric-vehicle (EV) manufacturer on the planet than Tesla (TSLA -3.40%). The EV giant, whose market cap dwarfs all other automakers, is the EV market share leader in North America, and looks to be on pace to easily eclipse 1 million deliveries in 2022. But not even turning the corner to recurring profitability is enough to make Tesla an attractive investment at its current valuation.
Although Tesla has successfully driven its first-mover EV advantages to big gains, holding its market share should prove virtually impossible given how much money legacy automakers and newer players are throwing at EV, autonomous vehicle (AV), and battery research. General Motors and Ford Motor Company are, respectively, earmarking an aggregate of $35 billion and $50 billion for EV, AV, and battery research.
To build on this point, we're already seeing instances of Tesla vehicles being out-innovated. Relatively new entrant Nio, an EV maker based in China, debuted two sedans this year (ET7 and ET5) that can achieve a 621-mile range with the top-tier battery upgrade. That's hundreds of miles of range above the Tesla Model 3.
Optimists will often point to Tesla being more than just a car company as added justification for its premium valuation. But a deeper dive into its income statements show that Tesla's solar business has been a drag since it was acquired. Though Tesla's energy ambitions may eventually pay off, its ancillary operations are a hindrance, not a help, at the moment.
But the biggest reason Tesla stock is more trick than treat is CEO Elon Musk. While he's viewed as a visionary by many, it's hard to overlook a growing list of innovations/product promises from Musk that have failed to materialize. Everything from 1 million robotaxi's being on the road by 2020 to level 5 full self-driving being perpetually "one year away" has proved false. Musk's empty promises are a big red flag for a company whose valuation is built on those promises.
Bed Bath & Beyond
A second ultra-popular stock that's undoubtedly more trick than treat is specialty home products retailer Bed Bath & Beyond (BBBY). Although Bed Bath & Beyond has been at the center of a few meteoric short squeezes over the past two years, a mountain of warning signs suggest investors should keep their distance.
Two years ago, even I was still somewhat of a believer that the company could complete a Best Buy-like turnaround. In October 2020, Bed Bath & Beyond unveiled a multipoint plan to invest $250 million to modernize its supply chain, aggressively transform its online sales experience, and "[curate] a differentiated product assortment to capture market share," according to the company. Unfortunately, the company's turnaround strategy has failed to materialize.
In addition to contending with the foot traffic challenges presented by the COVID-19 pandemic, Bed Bath & Beyond's product lineup has never been differentiated enough to make it a go-to source for home goods. Having a brick-and-mortar-focused sales setup has also made it very difficult for the company to compete against a myriad of online retailers that can undercut its prices. Not surprisingly, comparable-store sales plunged 26% in the most-recent quarter for the company.
But maybe the biggest blunder of all has been Bed Bath & Beyond's ongoing shareholder buybacks that have strapped the company for cash. Virtually all of the company's buybacks have occurred at a considerably higher share price, leading to no value creation for its shareholders.
If you need additional proof of how much trouble Bed Bath & Beyond is in, take a closer look at its bonds. A $300 million bond issued in July 2014, which is due in August of 2024, is currently trading at 81% below par ($0.1852). Bonds that carry 180% yields to maturity are a massive red flag that the bond market doesn't believe the common equity (i.e., Bed Bath & Beyond's common stock) has any value.
Image source: Getty Images.
SNDL
The third ultra-popular stock that's proved to be more trick than treat is Canadian marijuana stock SNDL (SNDL 0.54%). If the name doesn't ring a bell, it could be because the company recently changed its name to SNDL from Sundial Growers.
There are three reasons investors have flocked to SNDL over the past couple of years: 1) The expected growth of the Canadian pot industry, 2) SNDL's large cash position, and 3) SNDL's relatively high short interest, which has made it a popular short-squeeze candidate. However, none of these factors overshadow the company's poor operating performance or its questionable management team.
In terms of former, SNDL shifted its focus away from wholesale cannabis to the retail side of the equation to take advantage of higher margins. But in doing so, the company had to effectively start from scratch. With Canadian pot customers gravitating toward low-margin value cannabis products, SNDL has had a difficult making this transition. As a result, the company has continued losing money.
To be fair, SNDL's cannabis struggles aren't entirely its fault. Federal and provincial regulators in Canada did a poor job of green-lighting dispensary and sales licenses in key regions. Nevertheless, the path to profitability is still a ways off for SNDL.
The other noted problem is the persistent dilution shareholders have dealt with. Though the expectation was that SNDL would sell enough common stock to eliminate its debt, it simply hasn't stopped issuing shares. Since Oct. 1, 2020, SNDL's share count has grown more than fourfold. What's more, the company was forced to seek a 1-for-10 reverse split just to remain listed on the Nasdaq exchange with a share price north of $1.
Though marijuana stocks have plenty of potential this decade, SNDL is an absolute buzzkill.
