As cases of the novel coronavirus appear to be making a comeback, the stock market is a risky place. The sting of March’s nosedive is still fresh in many investors’ minds, and the market’s epic rise toward new highs in the space of just a few weeks has some worried about valuations. In short, all stocks are risky stocks when the environment is this uncertain.
That said, investors can still find value among financially stable stocks whose valuations haven’t been overblown. On the flip side, some of the most heavily traded stocks right now are also carrying a lot of risks. With that in mind, here’s a look at seven risky stocks investors should be avoiding for now.
- Occidental Petroleum (NYSE:OXY)
- Macy’s (NYSE:M)
- Fastly (NYSE:FSLY)
- Beyond Meat (NASDAQ:BYND)
- Nio (NYSE:NIO)
- Tesla (NASDAQ:TSLA)
- Carnival (NYSE:CCL)
Occidental Petroleum (OXY)
The oil and gas sector has been on a roller coaster ride over the past few months as supply and demand issues brought on wild price swings. The sector remains depressed overall as a slowdown in the global economy coupled with a shift toward renewable energy weighs on share prices. That weakness could offer a value play for long-term investors who are picky about the quality of their oil bets — Occidental Petroleum is simply not one of those quality picks.
OXY stock is struggling under a mountain of debt with no way to ease the burden. The firm was set to start selling off some of its assets in Algeria and Ghana, but the Algerian government shut the deal down before it could go ahead.
Speculators have been circling OXY stock of late in hopes that the stock will enjoy a boost as oil prices continue to stabilize. But even then, Occidental is still carrying around a mountain of debt from its 2019 Anadarko acquisition and the firm has no way to pay that down.
There’s a chance Occidental won’t make it through the pandemic without declaring bankruptcy — especially if there’s a second wave of infections in the fall. With that in mind, investors who want to take a punt in the oil and gas sector should look elsewhere for a more financially stable pick.
Another place value investors are sniffing around is retail. Lockdowns brought foot traffic at brick-and-mortar stores to a screeching halt and, in many cases, ended up causing bankruptcy for those without a strong online presence. Coronavirus-induced lockdowns have probably accelerated a wave of bankruptcies among antiquated retailers whose businesses were dying a slow death already.
Department store Macy’s is one such company that simply doesn’t appear to be capable of making a comeback. Macy’s had understandably disastrous first quarter results and the second quarter is likely to bring on more of the same, but all of that can’t be attributed to Covid-19 alone.
Macy’s has struggled against e-commerce giants like Amazon.com (NASDAQ:AMZN) that give customers an easier, and often cheaper, way to shop. Notably, Macy’s hasn’t gone down without a fight. The company has been working to build out an omnichannel experience for customers, cut costs, and grow its private label business.
With coronavirus on the table, those plans are likely to be delayed, if not scrapped altogether, making Macy’s one of the risky stocks in the retail sector.
The bottom line for M stock is that the company wasn’t aging well to begin with. Coronavirus is pushing it toward an early grave.
Cloud computing firm Fastly has had a meteoric rise after the company impressed investors with good Q1 results despite the drag of the pandemic. FSLY stock is up more than 70% since the beginning of May as investors seek out stocks that are insulated from the drawbacks of lockdown.
Fastly’s business is based on ramping up internet traffic speeds through a cloud-based platform. With many companies still encouraging employees to work from home and web traffic on the rise, FSLY’s services are more valuable than ever. That’s helped the company gain investor confidence over the past few weeks.
It’s not that Fastly is a bad bet, necessarily, but FSLY’s share price has risen to a level that makes it inherently risky — especially in today’s volatile market.
Bank of America’s Dal Liani, who was previously bullish on the stock, said it could be time to take profits on FSLY stock. Liani cautioned that its valuation is, “somewhat inflated,” and that it assumes, “near-perfect execution despite lingering competitive risks.”
With that in mind, investors may want to consider waiting it out on the sidelines as Fastly stock is bound to stumble in the challenging environment ahead.
Beyond Meat (BYND)
As a vegan myself, it pains me to consider BYND stock a no-go. After all, the company’s meat-like burgers are somewhat of a gateway drug into the world of plant-based living. For many people, the idea of giving up meat completely sounds impossible, so a near-enough burger alternative could ease the transition considerably.
Beyond Meat is one of the risky stocks because it just isn’t a great investment. I think the burgers are somewhat of a fad, and their popularity will wane over the next few years. Not only is there a ton of competition in the fake meat space — from meat producers like Tyson Foods (NYSE:TSN) to small competitors like Impossible Burger — but there’s also competition from run-of-the-mill plants.
It’s cheaper and healthier to eat whole foods rather than processed fake meat on a vegan diet. It’s also cheaper (and debatably healthier) to eat regular meat. So, that leaves a very small gap that Beyond Meat and a ton of other competitors are trying to fill.
If ever there were a sign that we’re smack in the middle of an electric vehicle stock bubble, it’s NIO stock. Like Fastly, there’s a compelling case for Chinese EV firm Nio. Matt McCall has been bullish on the stock despite its meteoric rise, pointing to the firm’s rejuvenated balance sheet and growth potential as the EV market continues to develop.
But I’m skeptical. NIO is one of more than 400 electric vehicle makers in China. Two-thirds of those firms are going to go bankrupt over the next few years as only a few winners emerge. Is Nio going to be one of those winners? Maybe, but considering the company narrowly escaped bankruptcy just a few weeks ago doesn’t fill me with a ton of confidence.
At some point, I’m expecting the electric vehicle bubble to pop, at which point I might consider NIO if it is still around. Until then, I’d group NIO in with the market’s risky stocks to avoid.
Speaking of an EV bubble, Tesla is on this list for the same reason that NIO is — except in Tesla’s case the issue is magnified. Love him or hate him, Tesla CEO Elon Musk has helped drive TSLA stock higher over the past few months with his outlandish comments and eccentric tweets. But like NIO, Tesla has become massively overvalued as investors got caught up in EV fever. And that’s what puts Tesla in the risky stocks basket.
Tesla’s market cap is now larger than that of Ford (NYSE:F), GM (NYSE:GM), BMW (OTCMKTS:BAMXF), Daimler (OTCMKTS: DDAIF), and Volkswagen (OTCMKTS:VLKAF) combined. While you can certainly make a case for Tesla — its impressive technology, its enthusiastic following — the case isn’t strong enough to justify that kind of valuation.
Keep in mind, Tesla isn’t the only one making electric vehicles. As Bloomberg’s John Authers put it, “Tesla is priced on the assumption it will have an eternal monopoly. If electric cars catch on, that will prove wrong.” Essentially, if you’re willing to buy Tesla stock at its current valuation, you believe Tesla is the Amazon of automakers — that roughly half of the market will belong to Mr. Musk.
If you haven’t already given up on cruise stocks, now’s the time to do so. People are not going on cruises anytime soon. As new coronavirus cases continue to surge in the U.S., not only are cruise ships barred from setting sail, but people are understandably anxious about being trapped inside with hundreds of strangers.
The cruise industry is in a precarious position as their high overheads and lack of government assistance will make it difficult for them to continue waiting out this crisis. CCL stock is an especially vulnerable player because of the bad press the company received at the onset of the crisis. Passenger deaths and stories of people confined to their rooms for prolonged periods of time have become a part of the company’s history.
Any cruse stocks are risky stocks right now because many operators are probably going to go bankrupt over the next few months as more people request refunds and the cruising schedule is pushed back further. Carnival says it can avoid bankruptcy through the end of the year, but what about 2021? There’s a chance coronavirus will be a continuing threat and even if it’s not, will people want to return to the ships? There are far too many “what-if’s” for CCL to be a worthwhile investment right now.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.