Investing is all about taking risks in exchange for the potential reward of a high return. However, some stocks have a very skewed risk-return profile. Everything would have to go right for the company to deliver the returns investors expect.
Many very popular stocks currently fall into this category. Carnival (CCL -0.66%), Medical Properties Trust (MPW -1.10%), Nvidia (NVDA 6.18%), Rivian Automotive (RIVN 6.10%), and Lucid Group (LCID 0.41%) are five uber-popular stocks that investors need to approach with caution, given their skewed risk-reward profiles.
Potential headwinds ahead
Shares of Carnival have rocketed nearly 90% so far this year. Driving the cruise ship stock's rally is growing optimism about the industry's recovery. However, the company faces two potential headwinds that could sink its stock in the future. While demand is robust right now, several indicators suggest a recession could be right around the corner. That could cool off demand for cruising as the economic uncertainty might lead people to hold off on booking vacations.
Meanwhile, Carnival took on a boatload of debt to stay afloat during the pandemic, a significant percentage of which is maturing over the next few years. The company needs to continue generating a lot of cash to repay that debt, which would become more challenging if an economic downturn weighs on cruise demand.
A dividend cut might still be forthcoming
Shares of Medical Properties Trust have tumbled nearly 40% over the past year. That has driven the healthcare REIT's dividend yield up over 11%. A payout in the double digits is often a warning that the market doesn't believe it's sustainable.
A dividend cut certainly seems possible for Medical Properties Trust. Rising interest rates, tenant issues, and property sales have pushed its dividend payout ratio up to around 90% this year. Meanwhile, the main driver of those property sales is that the company couldn't refinance upcoming debt maturities due to deteriorating market conditions and its credit situation. While Medical Properties has addressed all its debt maturities through next year and should start receiving rent from delinquent tenants, a dividend cut isn't off the table. That makes the REIT a high-risk option for income-seeking investors.
A pricey AI play
Nvidia stock has skyrocketed nearly 165% over the past year, driven upward by AI-powered enthusiasm. That has the semiconductor company trading in nosebleed territory. The company sells for 58 times forward P/E, 44 times sales, and 224 times free cash flow. Those are extremely high valuation metrics. Nvidia would have to grow extraordinarily fast for a long time to justify its current valuation, which seems unreasonable. If growth slows, the stock could take a nasty fall.
A high-priced EV maker
Electric vehicle (EV) maker Rivian Automotive currently has a $24 billion market cap, about half the level of iconic automakers Ford and GM. That's a pricey valuation for a company producing far fewer vehicles and losing money hand over fist. Rivian expects to only produce about 50,000 vehicles this year and lost another $1.4 billion in the first quarter. For comparison, Ford sold over 450,000 units in the first quarter (including nearly 11,000 EVs) and earned $1.8 billion.
Rivian also faces growing competition as traditional automakers like Ford expand their EV lineups. That will make it even more challenging for the company to turn the corner on profitability, especially as rivals start competing on cost. For example, Ford recently cut the price of its F-150 Lightning electric truck by around $10,000. While Rivian currently has a strong order backlog to insulate it against the current EV price wars, it might not be able to hold on to this pricing power if competition continues to heat up.
A deluge of dilution
Shares of EV maker Lucid Group have plunged more than 60% over the past year because of how quickly it's burning through cash. It recently raised another $3 billion from investors, which is enough money to continue operating through the middle of 2025 at its current cash burn rate of about $1 billion per quarter. That cash infusion significantly diluted existing investors, given the company's current market cap of $12.6 billion.
More dilution might be forthcoming. The company will likely need to raise additional cash since it's still a long way from turning the corner on profitability. That will likely cause further dilution, which could put more weight on the share price.
Lucid Group also faces the same competitive pressures as Rivian. The company responded to Tesla's price cuts earlier this year by offering a $7,500 discount on its Lucid Air model. Additional price cuts could accelerate its cash burn rate. That could push profitability further into the future and hasten the need for additional dilution.
These popular stocks might not live up to the hype
Carnival, Medical Properties Trust, Nvidia, Rivian, and Lucid are popular with investors these days because of their return potential. However, they either have high valuations or are facing significant headwinds, which could impact their ability to deliver the returns investors expect. That makes them really risky, which is why investors should carefully consider the downside before following the crowd into these stocks.
