The year 2020 will go down in the history books not only for the devastation of the novel coronavirus but for the insanity that it sparked. Usually, when you’re faced with a once-in-a-century pandemic, along with an unprecedented combination of political vitriol and social unrest, most equity investments tend to become cheap stocks. And I don’t mean that in a contrarian sense but as a negative.
Still, we did not get a repeat of the Great Depression. Instead, we apparently received the revival of the Roaring Twenties — something that our own Matt McCall has pounded the table on for years. Obviously, it’s hard to argue against him right now. His thesis has turned out correct and his followers have earned massive profits on cheap stocks that became much more expensive. But can this dynamic last?
Ever the negative Nancy, I have my doubts. I may not know everything about the investment markets — who does? But what I can tell you is that rampant speculation causes extreme boom-bust cycles. Note that I said boom bust, not boom boom. Frankly, the equity market is like your digestive system. Food goes in, something else goes out. Too much of one-sided transactions, whether that be for cheap stocks or anything else, creates huge problems.
You might think that I’m just being facetious with the above illustration (I hope you weren’t eating). Actually, the framework for highly speculative cheap stocks is likely fundamentally flawed. For instance, U.S. household debt hit a fresh high at the end of 2020. This is only going to get worse as people chase the crazy housing market out of desperation.
And when people are desperate, they do silly things, like dump their investments in order to buy overpriced assets. Generally, this represents deflationary pressure. Plus, you have record levels of investors buying securities on margin, which tends to end badly. I believe that popular cheap stocks on social media are particularly at risk for a severe correction.
- Electrameccanica Vehicles (NASDAQ:SOLO)
- Zomedica (NYSEAMERICAN:ZOM)
- ZK International Group (NASDAQ:ZKIN)
- Senseonics (NYSEAMERICAN:SENS)
- Luminar Technologies (NASDAQ:LAZR)
- Sundial Growers (NASDAQ:SNDL)
- Koss (NASDAQ:KOSS)
Keep in mind that this list isn’t necessarily about selling your holdings. Rather, it’s an invitation for you to perform due diligence objectively. If you do, I believe you’ll find that many popular cheap stocks need a breather before they become buyable again.
Cheap Stocks to Avoid: Electrameccanica Vehicles (SOLO)
As you know, one of the most popular investment categories is the electric vehicle. Combining new technologies, lower cost of ownership (past the point of sale) and an environmentally friendly profile, EVs enjoyed soaring demand. Therefore, many investors looked for cheap stocks that were tied to this industry. Sounds like a no-brainer, right?
Indeed, this turned out to be the case. But eventually, even the sector itself — forget individual companies’ risk-reward profiles — became a bubble. Just because you attach an “electric” label on something doesn’t necessarily mean that it will be successful. I think you’re seeing this play out with Electrameccanica Vehicles.
Electrameccanica specializes in three-wheeled EVs via its flagship Solo, a commuter-centric, single-person vehicle. As Wired.com pointed out, though, three-wheeled cars have not had much commercial success. They’re particularly awful in the U.S., where people prefer larger utilitarian vehicles.
Fundamentally, I don’t see the case for SOLO stock. Yes, people are buying EVs but those that do want a normal transportation platform, not one that’s geared specifically for single-person commutes. Plus, the Solo is very expensive for such a compromised vehicle. I’d avoid SOLO’s relative discount until the company starts proving itself.
Looking at Zomedica from a broader perspective, it’s hard not to appreciate the company. First, Zomedica specializes in diagnostic platforms for dogs and cats. In particular, the pet care firm has a diagnostic tool for thyroid testing. Our own Will Ashworth noted that it has 70 patents issued or pending, making ZOM one of the cheap stocks with substance.
Second, Americans in general love their pets. Last year, we collectively spent $103.6 billion for our furry friends, up from $97.1 billion in 2019. Further, vet care and product sales accounted for $31.4 billion, the second highest allocation (behind pet food and treats at $42 billion). When you factor in that millennials especially love their non-human family members compared to older generations, you have a compelling narrative on ZOM stock.
But the rude lesson I’ve learned in years past is that the market is the ultimate arbiter. If it wants to bid up a certain company, it will do so. If not, you should watch out.
While I understand the bullish arguments supporting ZOM, its technical picture is fraught with risk. This is one of the cheap stocks to avoid until you get better signals.
Cheap Stocks to Avoid: ZK International Group (ZKIN)
Admittedly, I don’t know much about ZK International Group. But that’s also part of the problem. Having contributed for InvestorPlace for over six years, I have a reasonably solid grasp of what people are buying. Therefore, my suspicions go up when a relatively obscure publicly traded firm enjoys tremendous enthusiasm.
Of course, when you’re dealing with cheap stocks, a lot of the names are unfamiliar to the staid portfolios of your typical Wall Street institutions. But ZK International, which bills itself as a “China-based engineering company building and investing in innovative technologies for the modern world,” has probably received attention for one main reason: cryptocurrencies.
On ZK’s website, it states that the company is “exploring new opportunities in the fields of smart contracts, distributed ledgers, supply chain management, and other efficiencies afforded by blockchain architecture.” That got many folks excited but it also brings a lot of risk to the table because of the crypto volatility.
Honestly, the presently fading sentiment in cryptos is due to the math. Tradable assets just don’t go up indefinitely until correcting. If you’re really dead set on ZKIN stock, you should wait until the underlying sector stabilizes.
If you want another example where the market is the ultimate arbiter, I invite you to consider Senseonics. Over the last several months, SENS transitioned from a down-in-the-gutter trade to one of the most popular cheap stocks. But unlike some of the wildly speculative plays out there, Senseonics delivers on the fundamentals.
Primarily, the company can change the paradigm for diabetes patients. Its flagship product, Eversense, is the only Food and Drug Administration-approved long-term continuous glucose monitor, according to Senseonics’ website. Therefore, diabetes sufferers can kiss painful finger pricks goodbye, along with the inconvenience of constantly having to monitor blood-sugar levels.
Senseonics is looking to expand its footprint with an 180-day Eversense glucose monitor. This has hit some snags regarding FDA approval, which apparently the market did not like. Still, when you consider that SENS stock is down 62% since Feb. 16 of this year, you get the impression that there’s something deeper spooking investors.
I think the temptation for SENS supporters is to argue the benefits of the underlying device. In reality, you should look at the technicals. The market is speaking loud and clear and it wants nothing to do with shares. I’d stay away until they break out of their bearish trend channel.
Cheap Stocks to Avoid: Luminar Technologies (LAZR)
Late last year, you wouldn’t label Luminar Technologies as one of the cheap stocks to buy because shares weren’t cheap. Instead, at their peak closing price, LAZR was just under the $42 level. But from there, it has been a wild and eventually ugly ride.
I find this unfortunate because I’m fascinated with the underlying technology and the autonomous driving industry at large. Luminar specializes in lidar, which stands for light detection and ranging. While I don’t want to jump into what could be a heated debate, lidar may be a superior technology (at least in the current frame) to passive systems such as cameras and sensors.
You see, lidar is an active ranging solution, using lasers to “sight” objects and ping back their location and other critical data. Yes, lidar interacts with its surrounding environment but it also relays critically important information. In contrast, sensors and cameras can see what the human eye does but it lacks the human brain.
As you might imagine, this can cause serious problems. But that doesn’t necessarily mean that lidar is the answer. Despite multiple advances in technology, if people don’t trust autonomous driving, the industry is dead. This may be spooking investors from LAZR stock and other autonomy-based investments.
Sundial Growers (SNDL)
One of the most frequently discussed cheap stocks levered to the cannabis industry, I can understand the appeal for Sundial Growers. First, it’s the main topic of this list: SNDL stock is priced under $1 at the time of this writing. In this crazy market environment, that’s a good enough reason (sometimes the only reason) to buy shares.
Second, Sundial Growers benefits from favorable political tailwinds. As I’ve mentioned with prior cannabis-related cheap stocks, two-thirds of Americans support marijuana legalization. That info came from the Pew Research Center in November 2019. More recently, a Pew survey revealed that fewer than 10% of U.S. adults say marijuana should not be legal at all. With generally green-friendly Democrats controlling Congress, SNDL stock should do well.
But the main challenge is that the cannabis sector is starting to look overcrowded yet again. More importantly, the market has voiced its displeasure with Sundial. In March, I warned that the technical setup for SNDL did not look encouraging.
It’s in correction mode right now and I believe investors must respect that before taking a shot.
Cheap Stocks to Avoid: Koss (KOSS)
In my opinion, Koss had no business spiking up to a closing high of $64 like it did on Jan. 29 of this year. For several years, Koss languished as its core headphones business suffered intense competition. Before the social media craze, KOSS stock was typically trading for under $2.
So yes, it’s one of the cheapest of cheap stocks. But it was that way for a reason. That is until a group of mostly young investors decided to give Wall Street the middle finger and bid up KOSS to remarkable heights. Mainly, the idea was to put short sellers out of business.
But reality is much more complicated than the “good guys versus bad guys” narrative that these social media justice warriors crafted. As it turns out, short traders facilitate true price discovery, rewarding fundamentally sound companies while penalizing failing enterprises.
Further confounding matters is that Koss insiders took the opportunity to exit out of their positions profitably. So, in essence, KOSS advocates took money away from one set of suits on the Street and gave it to another. Good job, I guess?
Frankly, I’d stay away from KOSS. This is probably one of the cheap stocks that has run its course.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.