What happened
Some of the weakest companies on the market had some of the biggest share price moves on Thursday. Their business fundamentals didn't change, but the stock market now thinks they're worth much more than it did just a day ago.
The three stocks that caught my eye were Carvana (CVNA 2.85%) jumping by as much as 17%, Skillz (SKLZ -0.95%) popping 14.9%, and Silvergate Capital (SI -20.00%) gaining 7.3%. The stocks were still up by 14.1%, 8.5%, and 2%, respectively, as of 2:45 p.m. ET.
So what
The broad market was rising Thursday in part because interest rates on bonds have dropped, which often correlates with a rising stock market. The yield on the 10-year U.S. Treasury bond was down 5 basis points Thursday to 3.84%, and similar dips could be seen for government bond yields around the world.
Stocks may also be climbing because the last few sessions have been down, and the combination of a scarcity of news and low trading volumes can lead to strange moves in the market.
The trading theme of 2022 has been "risk off," but on Thursday, the market is clearly going "risk on." However, there's reason to remain skeptical about these three stocks specifically.
Skillz and Carvana specifically are burning cash even as their stocks fall and their growth slows. This could be disastrous if the economy or business conditions get worse in 2023.
CVNA Cash from Operations (TTM) data by YCharts.
Silvergate has been facing liquidity problems resulting from a potential run on the bank after FTX collapsed. Lower interest rates may seem to help on the surface, but this is fundamentally a crypto lending company that will have structural risks to handle in 2023, and not even lower rates will help that.
Now what
I don't think investors should be taking a risk on any of these stocks right now given the financial trouble the companies are in. Carvana has been one of the hardest-hit stocks in the auto business because it hasn't been able to turn a profit, and now that used car values are falling, it may be sitting on huge losses on the inventory of vehicles it has built up.
Skillz's business model should have been profitable from day one, but it hasn't yet proven it can make money, and now apps and video game companies are cutting back on their advertising and marketing spending, which could crush the business long term.
It's possible Silvergate will recover, but investors don't know exactly what risks will surface next in the crypto industry, so staying out is a wise move for now.
High-risk stocks may be having a moment of popularity, but that narrative could quickly change. And I think the theme of 2023 will be investors putting a greater focus on profits, so management teams will need to show they can make money in their core businesses by either growing revenue or cutting expenses. I don't have any confidence that any of these three companies can do that, which is why I'm staying away from their shares.
