The stock market is blasting off right now. Every week, the major indexes hit new record highs. Rightly, many investors are worried about stocks being overvalued. Certainly, most of the blue chips are going for ever-more-lofty prices. So, not surprisingly, many traders are turning to penny stocks to try to find cheaper alternatives in an expensive market.
But beware: Most penny stocks sell for a lowly price with good reason. While the occasional penny stock goes on to become a huge winner, the vast majority of them are struggling firms with major fundamental defects.
The recent short squeeze excitement lifted many highly shorted penny stocks over the past month. Now that the ringleader, GameStop (NYSE:GME), has crashed, however, many other Reddit stocks are set to tank. In any case, here are seven risky penny stocks that you need to be really cautious with here:
- Sundial Growers (NASDAQ:SNDL)
- Naked Brands (NASDAQ:NAKD)
- Castor Maritime (NASDAQ:CTRM)
- Northern Dynasty Minerals (NYSEAMERICAN:NAK)
- Uxin (NASDAQ:UXIN)
- Genius Brands (NASDAQ:GNUS)
- iBio (NYSEAMERICAN:IBIO)
Sundial Growers (SNDL)
Sundial Growers has been one of the most popular penny stocks in recent weeks. It’s not hard to see why. Marijuana stocks are positively soaring right now. Marijuana legalization gained some key electoral wins in November, and is making progress in the U.S. Congress as well. For many people, cannabis is a must-own sector here.
That said, traders have latched onto SNDL stock in particular for a less defensible reason: It has the lowest share price. Of the major cannabis firms, Sundial is the one deepest in penny stock territory. Thus, for folks just looking at stock prices, perhaps Sundial seems optically inexpensive.
However, Sundial’s low share price is justified. The company’s operating results have been dire in recent quarters. And, on top of that, Sundial has issued a mountain of shares. Thus, even given the low share price, the market is valuing Sundial at around $2 billion right now. That’s an awful lot of money for a company that is only generating $54 million a year in revenues and racking up large losses in the process of doing so.
Sundial rode the r/WallStreetBets (WSB) phenomenon on up, but beware, it could quickly tumble like the rest of those companies.
Naked Brands (NAKD)
Similar to Sundial, Naked Brands benefitted from being in the right place at the right time. The WSB crowd put a laser focus on the practice of naked shorting, where short sellers bet against companies without securing a legal borrow of the security first.
Not surprisingly, it was only a small jump for the online trading crowd to start talking up the struggling Naked Brands, linking it with naked shorting and suggesting that the penny stock could skyrocket on a short squeeze. For a while, it worked. NAKD stock leapt from 10 cents to as high as $3. Then the Robinhood trading halt hit, which included NAKD stock, and the squeeze broke.
Naked’s shares are quickly in retreat, since, like GameStop, Naked’s fundamentals are terrible. Naked was losing lots of money and seeing revenues shrink even before the novel coronavirus pandemic hit. Then, once Covid-19 arrived, Naked’s sales tumbled as retail clothing stores had to shut down. This is a company that didn’t have a clear business plan even before the pandemic and is in deep trouble now. NAKD stock, on a split-adjusted basis, traded for $500 a share just a couple years ago. It’s at a dollar now, and is heading lower quickly. Steer clear of this one.
Castor Maritime (CSTR)
This is another one that got caught up in the WallStreetBets excitement. Castor Maritime rode the short squeeze waves from 20 cents to a buck. However, as a dry bulk shipper with just eight vessels now trading for a half a billion dollar market capitalization, people are going to quickly come to their senses. By contrast, peer Star Bulk (NASDAQ:SBLK) has 126 ships and currently has a market cap of $1.1 billion. One of those is not like the others.
Dry bulk shipping is an okay industry, no arguments there. But it’s not electric vehicles (EV), online gaming, 3-D printing or something else that is transforming the economy. The value of shipping companies simply don’t go up fivefold in a few weeks. Notably, the rest of the dry bulk shipping industry hasn’t been doing anything like Castor’s stock either.
It seems Castor simply followed the short squeeze crowd. Like Naked, it was also blocked from trading at Robinhood during the height of that excitement a couple weeks ago. Soon enough, traders will look around and wonder why they’re holding a sleepy $1 shipping stock that was at 20 cents recently. When they do, look out below.
Northern Dynasty Minerals (NAK)
Trading for just 74 cents, Northern Dynasty finds itself deep in penny stock territory. Shares unceremoniously crashed 50% in a single day last November. That came following the news that the Trump Administration rejected Pebble’s mining permit in November 2020.
The Pebble project has been under environmental scrutiny for many years now. Opponents suggest that it would gravely harm one of North America’s key salmon fisheries. Northern Dynasty obviously argued the opposing view. However, even under the Trump Administration, the government ended up siding with the environmentalists.
Needless to say, if the mine couldn’t get permits under Trump, the odds of it happening with President Biden are minimal. Biden has already made some moves by executive order, such as blocking the Keystone XL pipeline, that show an increased preference for the environmentalist position on natural resources. All that to say that Pebble won’t be turning into a mine anytime soon.
Despite this series of unfavorable developments, traders are rushing back into NAK stock. Shares dropped below the 40 cent mark on the permit rejection but have doubled now off the lows. In fact, shares have regained almost all their losses since the negative government decision in November.
This simply makes zero sense, given that the mine project is on ice for at least the next four years and Northern Dynasty has little else to bolster the stock price. As if that weren’t bad enough, the Department of Justice is also investigating Northern Dynasty and its ex-CEO. With all that in mind, there’s no reason for NAK stock to be rallying here.
Uxin Limited (UXIN)
Chinese auto dealership company Uxin has traveled a bumpy road recently. UXIN stock crashed from $7 to $3 in 2018-19. And with the pandemic, things went from bad to worse.
Uxin transitioned away from offline sales to a digital-first strategy. That’s not the sort of thing you can simply flip on overnight, however. In the company’s most recent quarterly results, revenues plunged 82% year-over-year. Transaction volume dove from 23,566 units to a paltry 2,653 in this latest quarter. Needless to say, the company is running operational losses.
Perhaps things will pick up again once the pandemic passes. But, it should be noted, other online auto dealers have done well in the pandemic. So, it’s unclear if Uxin will be able to pivot successfully. We just got another negative sign though, as Uxin’s CFO has stepped stepped aside. That’s not reassuring.
Genius Brands (GNUS)
Genius Brands briefly became a hot stock last summer around excitement over its streaming network for kids, the Kartoon Channel. It appears this failed to achieve much; Genius hasn’t disclosed viewership figures and meanwhile the share price crashed from $8 to the $1 level.
GNUS stock is back on the rise lately as the company has lined up some new programs. Perhaps one of these will eventually be a hit. It’s tough though. There has never been a more competitive marketplace for streaming video content.
In the meantime, Genius is just spinning its wheels. For Q3 2020, Genius generated a grand total of $274,000 in revenue while losing $3.4 million from operations. This is a tiny business. Yet, in the market’s infinite wisdom, this miniscule money-losing media upstart is worth $550 million. That’s non-sensical.
Might this be a decent niche business someday? Maybe. Is it worth more than half a billion dollars today? Almost certainly no.
It appeared that IBIO stock’s moment had passed. Shares crashed back from $7 last summer to $1 at the start of 2021. The reason why was obvious: A bunch of successful Covid-19 vaccines were coming to market. Meanwhile, iBio was left far behind in the race for a vaccine. This is common to iBio’s corporate history. The company investigates many potential products for well-known diseases such as H1N1 and Ebola, but has brought little to market successfully.
Over the past 10 years, iBio has never produced more than $3 million of revenues in any individual year. The company is great at delivering enticing press releases. It’s not so good at turning any of that excitement into revenue or profits.
So it seems will happen with the company’s Covid-19 products. Still, IBIO stock is climbing again, as it’s up from $1 to $2.50 or so. The company did hire a new chief scientific officer. That, plus the general short squeeze in highly shorted stocks has given IBIO stock a jolt. Don’t overstay your welcome though. Assuming the Covid-19 vaccine goes nowhere, iBio’s half a billion dollar market cap is excessive.
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.