The stock market is flush with stocks to buy that are buoyed by hope more than fundamentals. Sometimes they’re called story stocks, cult stocks or even meme stocks. There are others who will say these so-called “hope stocks” are simply momentum plays for the shrewd investor.
But in many cases, they’ve become so far disconnected from the fundamentals that buying them is more of a bet on the market’s wider psyche than it is on the company itself.
I’ve pulled together a list of seven such companies whose valuations have gone stratospheric based on what-ifs rather than operational effectiveness.
My list, in no particular order, is:
- GameStop (NYSE:GSE)
- AMC Entertainment Holdings (NYSE:AMC)
- Tesla (NASDAQ:TSLA)
- Stitch Fix (NASDAQ:SFIX)
- Redfin (NASDAQ:RDFN)
- Snap (NYSE:SNAP)
- Carnival Corporation (NYSE:CCL)
Hopium Stocks to Buy: GameStop (GME)
It’s impossible to talk about hope stocks without leading with GameStop. Perhaps, a few months ago there existed a valid argument that the video-game retailer was in some way undervalued. In the past month, its share price is up almost 350% despite the fact that the company itself has released no new financial information in the same time period.
This isn’t the first time GME stock has had a monumental rise off the back of Reddit forums and retail investors hoping to make a quick buck — but this time it feels different. Short interest in the stock has dropped considerably and all that’s left to prop GME up are the index funds forced to hold it and a rowdy crowd of Redditers with “diamond hands.”
It’s also different because GameStop has earnings on the horizon. In the most likely scenario, that doesn’t mean much because people buying GME for $275 per share probably don’t care much about cash flow and margins. But GameStop could offer up new shares to the hoards of internet traders clamoring for a stake in the meme stock— that would be a game-changer for the retailer as it attempts to live up to its massive market capitalization. But, it would also dilute existing shares, and could turn the Reddit crowd away.
AMC Entertainment Holdings (AMC)
If GameStop wins first prize in the hopium stocks to buy race, AMC is the first runner up. Like the video game retailer, the company is bogged down with an antiquated business model that was dealt a knock-out punch when the pandemic hit.
As such, it was a heavily shorted security and Redditors set their sights on it around the same time as the GME phenomena. Although the stock has come down since touching $20 per share at the end of January, its current price tag of $11 per share remains lofty.
First, there’s the fact that movie theaters like AMC were already on the decline before being inside with large groups went out of fashion. Now that things are starting to reopen, many people are likely to have gotten used to watching films from the comfort of their living rooms. But more importantly, the group narrowly avoided bankruptcy by taking out loans and issuing stock.
It’s hard to overstate the extent that shares of electric car maker Tesla are tied to hope. Before Musk and his army of TSLA fanatics clap back— let me say this— it’s not that Tesla has no growth story at all. The electric vehicle maker is not in the same camp as GME stock or AMC. There’s a solid company here, but it’s overvalued at present and investors are paying a huge premium to take a big risk.
But Tesla’s market cap and price-earnings ratio ratio suggest it’s the most valuable car maker in the world. That might be explainable because of all this growth the company is expected to experience, but the group’s main source of income is selling off the regulatory credits it earns for being zero-emission to those that need to offset their carbon footprint.
Selling cars, on the other hand, isn’t really its bread and butter. And if that’s the goal, being a luxury car retailer following a global pandemic when huge swaths of the population have been unemployed for almost a year isn’t a great position.
Stitch Fix (SFIX)
Stitch Fix might be a surprising one to see on this list, considering SFIX stock has lost roughly half its value since the end of January. Traders abandoned the subscription-based personal styling service after disappointing results that saw a revenue miss and pared down future guidance.
Many people saw the resulting dip as a buy opportunity for SFIX stock and the share price clawed back almost 10% in the week following the earnings report. But those pointing to SFIX as an undervalued stock are leaning heavily on hope, not fundamentals.
First of all, there was the fact that revenue per client fell 7%. Yes, the service saw a surge in customers, but if they’re not buying things, that’s not a great excuse. It’s possible you could write off the margin declines as an inventory issue caused by the pandemic — but there’s no guarantee that’s not a larger shift away from these kind of services either.
Finally, the group saw capital expenditure increase dramatically due largely to the bump up in minimum wage. That’s a cost that will stick around and continue to weigh on already fragile profits.
Disruptive technology is a buzzword for investors looking for growth stocks to buy. Everyone wants to buy the next Amazon (NASDAQ:AMZN) while it’s still selling used books — the trouble is that finding something like that is akin to finding a needle in a haystack. For every Amazon, there are hundreds of BlackBerrys … or even companies that would consider BlackBerry a roaring success.
I’m not suggesting that Redfin is BlackBerry (NYSE:BB), but it’s not Amazon either. The group’s online platform aims to make home selling cheaper and easier for Americans while also building out a property flipping service that will buy properties quickly.
It’s a great idea, I’ll give them that. And the company isn’t doing poorly execution-wise either. But it’s also not alone in the business — it has tons of competitors offering exactly the same services.
Gary J. Gordon lays out a compelling reason to be cautious of Redfin, musing that the firm is actually fairly valued at $17 per share (77% below where it’s trading today).
But if hopium and growth stories are more your thing, consider this: the biggest risk to the economy right now — and consequently the housing market — is inflation. Rising inflation means the Federal Reserve will hike interest rates, which will make mortgages harder to come by. It’s not a certainty, but it’s a risk, and it’s not priced in to Redfin stock.
There’s no doubt that the pandemic has been a boon for Snap — forcing teenagers to isolate at home meant the group saw both daily active users and revenue per user rise considerably in 2020. To the group’s credit, they’re capturing the attention of elusive younger generations, and that’s valuable from an advertising standpoint.
But while Snap has managed to thrive as a stay-at-home stock, I wouldn’t say it’s one of the best social media stocks to buy. First, it’s costing Snap huge amounts of money to rope in and hold onto its users — rising operating expenses caused the firm to report a full year loss.
More importantly, though, is the fact that SNAP stock is trading at a much higher valuation than peers like Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR). Is SNAP a better, stickier company? Unlikely — if there’s one lesson the past decade has taught us, it’s that social media fads are a dime a dozen. With TikTok and Clubhouse also on the scene, it’s debatable whether Snap will ever achieve the organic growth it needs to turn profitable.
Carnival Corporation (CCL)
Everyone loves a comeback story, particularly a year into a global pandemic. Carnival might be able to offer that, but investors considering this one of the best recovery stocks to buy are a little bit impatient about when that rebound is coming.
CCL stock is up 70% from where it was when the pandemic struck, as investors prepare for pent-up demand to swarm the cruise industry once vaccination rollouts have progressed.
But it’s not quite that simple. While CCL might be a recovery story in the post-pandemic world, it’s not going to see the same immediate bump that retailers or restaurants might see. That’s because it’s essentially impossible to lock thousands of people on a ship safely unless they’ve all been vaccinated. Even then, there will be concerns about carrying and spreading the virus at ports around the world (particularly those with slow vaccine rollouts).
Instead, we can expect cruise lines to recover behind long-haul airlines. If you want to know how that’s going, just have a look at wide-body engine-maker Rolls Royce’s (OTCMKTS:RLLCF) results. The group expects engine flying hours to climb to 80% of normal levels in 2022. If people aren’t getting on planes, they’re not getting on boats.
It’s not that CCL doesn’t make for a good recovery play — the group looks unlikely to go bankrupt and the cruise industry isn’t going to disappear — but it’s going to be a long wait and the group’s current share price doesn’t reflect that.
As of this writing, the author did not hold a position in any of the aforementioned securities.