November was an absolutely wild month for the stock market. Any number of companies that had been total dogs all year suddenly took off. Everywhere you looked, things were going up 25%, 50% or more — virtually overnight. Airlines, restaurants, retail, the novel coronavirus losers roared back to life. In this environment, traders have started picking through penny stocks looking for the next big comeback story.
However, not all the trash is going to turn into treasure. Many penny stocks are priced low precisely because their forward prospects are dour. In a market this boisterous, there’s a huge opportunity cost to investing in penny stocks that are unlikely to ever recover.
So, if you’re holding any of these seven penny stocks — or pondering a new position — I’m here to tell you to sell or avoid them:
- Northern Dynasty Minerals (NYSEAMERICAN:NAK)
- Alkaline Water (NASDAQ:WTER)
- Chesapeake Energy (OTCMKTS:CHKAQ)
- Washington Prime (NYSE:WPG)
- iBio (NYSEAMERICAN:IBIO)
- Hall of Fame Resort & Entertainment (NASDAQ:HOFV)
- Ideanomics (NASDAQ:IDEX)
Northern Dynasty Minerals (NAK)
Northern Dynasty Minerals is a junior gold exploration company focused almost exclusively on the Pebble Project in Alaska. Pebble is not a working mine yet, or anything close to it. Rather, it’s a huge gold deposit that is still awaiting permitting from the government to continue development.
Unfortunately for Northern Dynasty, the project is located in a remote and pristine corner of Alaska near a vital salmon fishery. Northern Dynasty has tried to advance the project for 13 years, however it has faced persistent roadblocks. First, the Obama Administration kept it from happening. Then, it appeared the Trump Administration might let Pebble go ahead. However, that fell through. Given concerns about the mine’s impact on nearby salmon — potentially damaging Alaska’s billion-dollar fishing industry — the U.S. Army Corps of Engineers denied the company’s permit last month.
Northern Dynasty can appeal the ruling of course. But if they couldn’t convince the pro-business Trump team to give the mine the go-ahead, it almost certainly won’t happen under Biden.
What value does a company have whose mine is unlikely to be built for at least the next four years, and quite possibly far longer than that? For more context, consider that the company had $48 million of cash as of last quarter and it loses about $50 million per year in operating costs. So you’ve got a non-functional mine site and less than a year’s worth of cash.
As of now, speculators are still supporting a $160 million market capitalization for this. That’s crazy. Don’t let the low share price fool you: There’s a ton of outstanding shares of NAK stock and thus this thing should continue to plunge in coming months as shareholders wake up to the reality that the mine simply isn’t happening anytime soon.
Alkaline Water (WTER)
If you follow certain celebrities, you’ve probably heard about the Alkaline Water trend. Some nutrition folks are suggesting that it’s smart to consume beverages with a high pH level as this naturally balances out the heavy acidity within the human body. In theory, this is supposed to improve people’s health and well-being. In practice, according to the Mayo Clinic, alkaline water is likely no better than drinking normal neutral pH water.
While the science doesn’t necessarily support the movement, high pH drinks have gained some consumer appeal nonetheless. And WTER stock is a direct play on the trend, as it has been building distribution for its less acidic water for years. As that business hasn’t really taken off, it has started doing more additions to its product line-up, including flavored beverages and CBD-infused products.
All in all, Alkaline Water has managed impressive top-line revenue growth. Since 2017, revenues have bubbled up from $13 million to $41 million per year. However, the operating loss has surged from $3 million to $14 million per year over the same span. So far, the company hasn’t found a way to grow profitably. Given the seemingly gimmicky nature of its core business, it’s hard to say whether a mass market will ever develop for Alkaline Water’s products.
In the meantime, folks are fueling a $78 million market capitalization for WTER stock even though it generates just $40 million in annual sales and loses sizable sums of money in doing so. Look for shares to continue sliding in coming quarters as dilution adds up. As of last quarter, the company had just $4 million in cash. So, given the size of its losses, it will likely raise more funds soon.
Chesapeake Energy (CHKAQ)
I recently explained why investors are running out of time to sell their Chesapeake Energy stock. Chesapeake is well into its bankruptcy reorganization process. At the end of it, CHKAQ stock will be cancelled, rendering shares worthless.
Some people seem to be confused, though. CHKAQ stock spiked as much as 20% in recent days, for example, as part of a broader rally in the energy sector. However, this is not a sound trading strategy.
Regardless of how much the oil and gas markets may recover, none of that profit will accrue to anyone who owns Chesapeake Energy’s old stock. All the economic value of the company will now go to the various classes of bondholders. Chesapeake may have a storied name in the oil and gas space, but as a trading stock, there is no value here whatsoever.
Washington Prime Group (WPG)
Will traditional shopping malls be able to make a post-Covid recovery? It remains an open question. Large mall operators face significant challenges and have seen their share prices battered over the past year. But you can make a case that the giants like Simon Property Group (NYSE:SPG) will do better in 2021 once social distancing measures can be relaxed. Washington Prime Group? Not likely.
Unfortunately, the B-tier regional mall operator won’t have that chance because it operates predominately smaller regional malls that simply don’t have the same draw in the internet age. And Washington Prime doesn’t have the balance sheet capacity or time required to redevelop its properties into something more fitting with the new economic climate.
Already, Washington Prime’s comparable smaller mall peers are reorganizing. Pyramid, CBL & Associates, and Pennsylvania Real Estate Investment Trust (NYSE:PEI) have all filed bankruptcy this year. Yet folks still haven’t thrown in the towel on WPG stock.
In fact, WPG stock has doubled in recent weeks, reclaiming the $1 mark for the time being. However, Washington Prime will soon follow its peers, given its terrible balance sheet.
Fitch recently downgraded Washington Prime debt to the lowly “CC” rating as the ratings agency sees it as “probable” that the company’s debt will be restructured or default within the next 12 months. Fitch also highlighted the Washington Prime’s poor competitive position:
“Operating performance weakness and capital access limitations have severely restricted the company’s ability to navigate retailer tenant stress. Fitch expects WPG’s property-level fundamentals will remain pressured by coronavirus-accelerated store closures and bankruptcies of non-performing retailers.”
In any case, if the creditors will have to make sacrifices, common shareholders are likely to get next to nothing. Thus, the recent rally in WPG stock is baseless. If you want to play a recovery, stick to the healthier mall plays like Simon.
I’ve sounded the alarm on shares of overvalued IBIO stock all year. With the Covid-19 vaccines now approaching the finish line, the clock has wound down on firms like iBio that were longshots in the race to develop their own products for the virus. And without Covid-19 excitement, what’s left for iBio?
Not a lot. Not much at all, in fact. Over the past decade, iBio has never generated more than $2 million of revenue in a single year. Read back through its press releases, and iBio has launched a ton of initiatives to address a textbook’s selection of medical issues. Yet, time after time, nothing comes from it. Covid-19 looks to be another such case; iBio generated a ton of coronavirus publicity but couldn’t turn it into tangible earnings. Despite this track record, shareholders are still giving iBio a generous valuation today.
To put iBio’s valuation in stark relief, consider the following. On Dec. 7, IBIO stock was trading around $1.50 per share. The next day, it announced it was issuing $35 million of IBIO stock at less than $1.20 per share to raise funds. Even today, iBio still has a market cap of $233 million. Yet, in raising a paltry $35 million, that action tanked the stock price by 20%. This speaks to the fundamental lack of demand for IBIO stock from institutional investors.
Thus, as traders get bored of the Covid stocks and sell, look for shares to keep deflating. IBIO stock sold for 30 cents before the pandemic took off. It may return there again in coming months.
Hall of Fame Resort & Entertainment (HOVF)
Next up, we have Hall of Fame Resort & Entertainment. For those unfamiliar, this is a company put together to try to monetize the National Football League’s (NFL) Hall of Fame in Canton, Ohio. At the time of going public via a special purpose acquisition company (SPAC), the company had minuscule revenues, even before taking Covid-19 into account.
However, the big idea here was to try to turn the Hall of Fame into a wide-reaching tourist draw by building a massive indoor water park, shopping center and hotel complex. According to the HOFV stock presentation, this was supposed to work because Ohio is centrally located and near to the majority of NFL franchises.
While this may have sounded great on paper, in reality, the demand for a massive water park and shopping center in a small Ohio city was probably not great, even prior to Covid. It’s certainly tenuous now. Even the new American Dream megamall in the New York City metro area is struggling due to the pandemic and changing consumer preferences. If that project could fail in the country’s biggest city, there’s reason to skeptical of this rollout in Canton.
What’s worse, Hall of Fame came public last month with a significant chunk of debt. This complicates the challenge of trying to raise capital to fund a questionable expansion plan all during a health crisis.
Needless to say, this SPAC has been a massive failure, plunging from $10 to $1.39 already. Even so, as the company has scant revenues and is losing money, shares could have much further to decline. There are better bets out there; just ask Baltimore Ravens fans.
Electric vehicle (EV) stocks have been huge in 2020. Some of them will invariably continue to be big winners in 2021. Others, like Ideanomics, will not. And it seems that we’re starting to see some sorting out of the field. Particularly with the gold rush mentality now, as every EV company out there prepares its own SPAC offering, the market is getting flooded with options.
Thus, the lower-quality companies like Ideanomics are struggling to retain investor interest. IDEX stock spiked from $1 to $4 earlier this year as it pivoted its business model to electric vehicles. As there were still few EV stocks at that time, this one stood out. Now though, the company’s issues have surfaced. For one, the company has previously chased hot fads such as blockchain and on-demand video streaming. Once those faded, it invariably switched to some new thing. Thus, the commitment to EVs may fade if Ideanomics decides to pivot again to something newer and more exciting.
There are related questions about how serious Ideanomics is with its EV business. Short-seller Hindenburg Research blasted the company, saying that Ideanomics had doctored photos of a purported sales location in China and that there was little evidence of the company actually doing business in EVs. While the company denied the report, it clearly had an impact; shares have been sinking for awhile now.
In any case, there are plenty of higher-quality EV stories to look at; few people are likely to remember IDEX stock by this time next year.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.