Overall, the stock market is enjoying an uninterrupted uptrend that began after March 2020. But that doesn’t mean there are not stocks that could crash if they show weakness.
At the height of the panic stemming from the novel coronavirus pandemic, the Federal Reserve lifted sentiment. And since then, negative news fails to send markets lower. The markets showed mild selling pressure in the weeks before the U.S. elections. It managed to brush that off, too. And with hot sectors like electric vehicles (EVs), clean energy and battery electric technology leading the market bullishness, investors need only worry about weakness elsewhere.
That said, investors have several leading indicators to look at in anticipating a potential crash in stocks. For example, a high short-selling volume would signal bearish in a company’s prospects. A stock whose valuations are too high and ran up too quickly is at risk of dropping. Still, a momentum investor would look at the daily trading volume of the stock. Conversely, a value investor would not consider an expensive stock to begin with.
Lastly, Reddit’s r/WallStreetBets attracted millions of new retail investors looking to get in on the fun. However, these new stock buyers should realize who they are up against.
In an email to InvestorPlace, Travis Box, Ph.D. (Assistant Professor of Finance, Wilbur O. and Ann Powers College of Business, Clemson University) shared a useful warning. He said that hedge funds “typically enjoy volatility and stock-picking so, now that they know the game is on, they are likely to enjoy a significant advantage in this environment. Everyone wading into these waters for the first time (which is anybody that started trading after 2008) should be aware that some pretty big sharks are out there.”
With all of that in mind, here are seven stocks that those investors should watch out for:
- fuboTV (NYSE:FUBO)
- Nikola (NASDAQ:NKLA)
- Rocket (NYSE:RKT)
- American Airlines (NASDAQ:AAL)
- BigCommerce (NASDAQ:BIGC)
- Nano Dimension (NASDAQ:NNDM)
- Snowflake (NYSE:SNOW)
Collectively, these stocks could crash if they show weakness. So now, let’s dive in and take a closer look at each one.
Stocks That Could Crash: fuboTV (FUBO)
fuboTV is on a sharp up-trend this year. Ahead of its earnings expected for March 2 after the market closes, investors expect the broadcasting firm to accelerate growth. This is achieved in two ways.
First, fuboTV will complement its sports-first live TV streaming platform by acquiring Vigory. This will allow it to leverage Vigtory’s sportsbook platform and digital gaming assets. Investors who bought Roku (NASDAQ:ROKU) or Netflix (NASDAQ:NFLX) early on will recognize fuboTV’s investment potential. Still, the stock trades at very high price-sales (P/S) multiples nearing 30 times. The short float is very high, too. A mild correction in the technology sector is enough to send FUBO stock lower.
In the table below, FUBO stock scores poorly on profitability. As it extends its business beyond streaming, its gross margins may improve:
Thus, investors buying fuboTV now are betting that it is on the cusp of strong profit growth.
Despite the market risks, fuboTV’s senior notes offering worth $350 million will strengthen its cash on hand. fuboTV will use the net proceeds to pay for working capital, sales and marketing — and to pay down its debt.
The controversy around Nikola and the embarrassing exit of its former CEO should have buried Nikola’s share price. The company claimed that founder Trevor Milton “was not a termination.”
The markets are too forgiving with the scandals surrounding the company. For example, the company admitted that its prototype truck did not generate power on its own. It pushed the vehicle down a hill in a promotional video.
That said, Nikola will not go bankrupt because it raised so much cash in an initial public offering (IPO). However, time is its enemy. The company could still face fraud charges, and lawsuits may pile up against the company. It will burn more cash the more aggressive it gets in investing in research and development. Despite the downside risks, Wall Street analysts have a $29.29 price target on NKLA stock, according to Tipranks.
Stocks That Could Crash: Rocket (RKT)
Rocket is a mortgage finance company that has innumerable advantages over traditional banks. Despite strong quarterly results, the short-float is more than 31%. Investors may have to hold the stock beyond its quarterly earnings, set for Feb. 25 after the market close.
That said, Rocket will need to post an exceptional report and raise its guidance. Failing to do so may send the stock crashing a few points.
Moreover, in the third quarter, Rocket posted GAAP earnings of 54 cents. Revenue nearly doubled (up 163%) to $4.74 billion. At a forward price-earnings ratio (P/E) of around 11 times, RKT stock is attractive. In fact, on Wall Street, the majority of analysts rate RKT stock as a “hold.”
However, the market disagrees.
The bears are skeptical about something. Slowing loans, falling margins, or a lower outlook for 2021 could pressure the stock. Nonetheless, fundamentals remain strong.
This is a profitable e-commerce firm that operates a conventional banking-like business. But by embracing electronic processing of mortgages, Rocket is ahead of its competition. And the market does not recognize that.
American Airlines (AAL)
In the airline sector, the pandemic is hurting passenger traffic. The business is so dire that American Airlines warned that it could lay off 13,000 employees. This will happen unless travel recovers or Congress gives it more federal aid.
That said, American Airlines mismanaged its capital reserves by buying back stock in the past. Now, it needs government assistance to sustain its workforce.
Below, AAL stock scores lower than three other airlines on quality:
BigCommerce is not growing as fast as it should be. The pandemic accelerated its short-term growth, but its end could slow down its prospects.
In November 2020, BIGC filed a follow-on public offering of its shares. Thanks to strong market conditions, the one million share offering did not hurt its stock price.
On its Q3 of 2020 conference call, BigCommerce’s Chief Financial Officer, Robert Alvarez, issued a light outlook for this year. He said, “…what we’re doing is we’re just taking a ramp down approach over the next three to six months ending Q1 next year, closer to where pre-COVID GMV levels were and — but I guess we’ll just have to see how Q4 plays out.”
In the chart below, BigCommerce will not post a profit until after 2022 at the earliest:
If the pandemic ends, the online shopping activities will fall, which will send BIGC stock lower. Investors will need to weigh the negative impact of the business reopening to this company’s online prospects.
Nano Dimension (NNDM)
After trading as low as 65 cents in the last year, Nano Dimension traded to the teens. The company wasted no time in direct offerings to take advantage of the market. It raised $332.5 million on Jan. 14, $250 million on Dec. 27, 2020 and $180 million on Dec. 6, 2020. In total, NNDM raised over $1 billion. It hired Needham and CarlSquare to assist it in acquisitions in the U.S. and Europe, respectively.
The pace of direct offerings should have hurt the stock price. Instead, market demand for NNDM stock appears unlimited.
As a company, NNDM sells a one-stop solution for “agile hardware development and innovative circuit design across a wide array of industries.” The stock market’s demand for 3D printing-related solutions is sending Nano Dimension’s valuations higher.
Eventually, markets will look at NNDM stock’s prospects and realize that costs keep rising every time it sells a product. The company treats the market as a piggy bank. Markets are slow to realize that, so this stock could crash at any time.
Stocks That Could Crash: Snowflake (SNOW)
After trading as high as $390 late last year, Snowflake’s lack of a moat could become a problem. The bullish buying against the short-float of around 16% lifted SNOW stock. If sentiment turns negative, then this stock could crash to lows not seen since its IPO.
Insiders held around 37.9 million shares with lockup expiring on Jan 7. On Dec. 15, 2020, employees could sell 25% of their vested options. That would amount to up to 11.3 million shares.
Fundamentally, Snowflake’s data cloud platform will serve its data consumers with reporting, ad hoc analysis and real-time analytics. The company has some customers in the travel industry, too. To sustain its growth, demand for traveling needs to improve. That will not happen until the pandemic is contained.
So, the rollout of the coronavirus vaccine should lead to a higher forecast in the travel and tourism sector. And this would undermine the risk of Snowflake stock falling.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.