So far this year, retail investors have pocketed fast gains thanks to the Reddit stocks phenomenon. Names like Gamestop (NYSE:GME) may be most well-known, popular with traders on subreddit forums like r/WallStreetBets.
However, there are scores of Reddit penny stocks that have made tremendous gains as well. Is this recent investing trend continuing? Or, like fads eventually do, is it fading away? Count on the latter. Some popular names have seen brief rebounds, but overall these “meme stocks” have lost much of their momentum since hitting highs back in February.
And unfortunately for a lot of them, “buying the dip” may not be the best call. With the enthusiasm fading and their fundamentals far from enough to sustain current valuations, these picks have more room to fall than potential to gain.
So, among the scores of penny stocks that once flew high as “Reddit stocks,” which ones should you be cautious about? These nine fading stars first come to mind:
- Asensus Surgical (NYSEAMERICAN:ASXC)
- Castor Maritime (NASDAQ:CTRM)
- Genius Brands (NASDAQ:GNUS)
- Hall of Game Resort & Entertainment (NASDAQ:HOFV)
- Ideanomics (NASDAQ:IDEX)
- Naked Brand Group (NASDAQ:NAKD)
- Ocugen (NASDAQ:OCGN)
- Sundial Growers (NASDAQ:SNDL)
- Zomedica (NYSEAMERICAN:ZOM)
Reddit Penny Stocks: Asensus Surgical (ASXC)
Formerly known as Transenterix, Asensus is trying for a second time to make its Senhance robotic surgery system a commercial success. It’s still a work in progress. But, starting in late December, Reddit investors caught wind of this relatively obscure small-cap stock and rode it to the moon.
ASXC stock soared from less than $1 per share to nearly $7 per share in a matter of weeks. Yet, after topping out in February, the early birds took profit. Pulling back more than 50%, shares trade today for around $2 per share.
Are additional losses just around the corner? It’s possible. Sure, the company raised over $110 million in cash via secondary offerings earlier this year. But, as InvestorPlace’s Vince Martin wrote on Apr. 4, the company needs to make progress with Senhance to justify its current stock price. Sales are set to rise this year. However, that’s far from being enough to justify today’s market capitalization of $498 million.
With Reddit stocks fading and the company’s results failing to support today’s valuation, further losses seem inevitable. Unless we see another round of the speculative enthusiasm we saw back in February, expect this once-hot stock to continue heading back toward its prior sub-$1 price levels.
Castor Maritime (CTRM)
Shipping play CTRM stock is another penny stock that went from zero to sixty (well, 19 cents to $1.95 per share, to be exact) during the early 2021 bubble in high-risk, low-priced stocks. What drew Reddit investors to this stock? More likely than not, it was probably its low share price coupled with its major-market listing.
By being listed on the Nasdaq Exchange, the stock was more available for trading among retail investors, like those who use the Robinhood app. In other words, the company’s fundamentals had little to do with its strong stock-market performance. No matter the reason, though, the company itself has taken full advantage of the recent attention, as seen from its recently priced $125 million direct offering.
This is on top of another dilutive equity offering executed back in January. With little in the way of hard assets or operating profits to justify its current valuation, Castor Maritime stock is nothing more than a “huge gamble” on Reddit stocks speculation. And, as seen from its continued drop since then — from around 90 cents to 45 cents — it’s been a gamble that hasn’t paid off.
The retail money that inflated CTRM two months back is leaving the room fast. So, with the upcoming direct offering potentially putting more downward pressure on shares, it’s best to cash out before Castor gives up the rest of its recent gains.
Genius Brands (GNUS)
Genius Brands, a children’s entertainment and streaming company, is trying to gain a foothold in a market dominated by major media and tech conglomerates. But, that hasn’t stopped risk-hungry speculators from turning it into a trading vehicle.
In fact, GNUS stock has been a “meme stock” since before meme stocks were even a thing. Last June, shares saw an epic parabolic move from pennies to prices above $10 per share. The stock also saw a relatively small boost in February, but nothing on par with its performance last summer.
Admittedly, the company has had some news lately that may help out the stock short-term. I’m talking about its partnership with Roblox (NYSE:RBLX) to turn the popular game into a series, available only for streaming on Genius’ Kartoon Channel. Even if that news failed to produce a massive pop, it may be enough to keep shares steady at today’s price well above $1 for now.
That said, don’t expect the Roblox catalyst to help sustain GNUS stock and its market cap in the long-run. Unless it can turn Kartoon Channel into a major streaming service, shares are likely to trend lower as the enthusiasm for low-priced, speculative Reddit stocks continues to dissipate.
Hall of Fame Resort & Entertainment (HOFV)
I may have said this one of the Reddit stocks, with exposure to the non-fungible token (NFT) trend, had room for one last rally. But, even if there’s potential for more NFT-related news to give Hall of Fame stock a “dead cat bounce,” the overall NFT trend may not last long enough to do so.
What are NFTs? They are digital files, like images or videos, that are stored on the blockchain and bought and sold as collectibles. The ones that have made the most headlines have been NFTs selling for millions of dollars. But, HOFV stock is a play on mass-market non-fungible tokens. Basically, the digital equivalent of sports trading cards.
Yet, this bubble may already be starting to burst. By the time this company gets around to offering its own line of football-related NFTs, it may be too late to cash in. And without this catalyst, there’s no way investors will be willing to pay today’s prices for HOFV stock, given the only thing backing them up is its ownership of the Football Hall of Fame in Canton, Ohio.
The hype around HOFV stock may have just started. However, that doesn’t mean it has the potential to carry on much further. With such high risk, consider this one of the top penny stocks to avoid right now.
If there’s one thing Ideanomics does well, it’s chasing trends. The company used to be focused on fintech. In recent months, however, it has evolved into an electric vehicle (EV) play.
As a result, it has attracted big attention from investors. IDEX stock has soared as much as fivefold between late November and early February. But, just like with other electrification plays, it’s fallen significantly off its highs. Now, even at around $2.70 per share, shares look overvalued.
How so? Rich valuations may be par for the course with EV stocks. Yet, unlike the major plays in this space, this isn’t a company focused on building one business. Instead, it’s a grab bag of electric vehicle holdings and investments. In essence, Ideanomics is throwing darts at a board and seeing what sticks. Holdings include an EV sales and financing business in China (Mobile Energy Global), a U.S EV startup (Medici Motor Works) and a company that’s building electric tractors (Soletrac).
Sure, one of this company’s many bets could turn into the next billion-dollar EV startup. But, with its current stock price more than factoring in this potential upside, there’s little gain from buying its recent pullback. Early-stage EV stocks like Fisker (NYSE:FSR) or Lordstown (NASDAQ:RIDE) may be worth the risk. But IDEX stock? This one of the Reddit stocks is more of a long-shot with terrible odds.
Naked Brand Group (NAKD)
Reddit stocks commonly have some sort of exposure to a trending sector. Think biotech, EVs, marijuana. What’s the trend helping to justify excitement for NAKD stock? E-commerce.
Naked Brand Group, a struggling retailer of intimate apparel, revved up investor enthusiasm with its announced divestiture of its brick-and-mortar business ahead of its transformation into a pure-play e-commerce company. But, while its war chest of $270 million gives it the potential to become a major purveyor of lingerie and related apparel online, it’s too early to say whether Naked can give L Brands’ (NYSE:LB) Victoria’s Secret a run for its money.
Now, with the stock falling from as much as $3.40 in late January to around 56 cents today, valuation isn’t completely out of whack compared to others on this list. After all, its aforementioned cash position makes up a large percentage of the current market cap. However, with the high chance that it burns through much of its current cash position, shares could continue to fall from here.
If it falls far enough, NAKD could be worth the risk for investors wanting to bet on a turnaround. As it trends lower, though, there’s little reason to consider this a screaming buy.
Covid-19 vaccine stocks were much more popular speculative plays during the summer. Once Moderna (NASDAQ:MRNA) and Pfizer (NYSE:PFE) started rolling out their respective vaccines, “also ran” plays lost a lot of investor interest.
However, although a bit late to the party, some have bet big on Ocugen. With a deal in place to bring Covaxin (developed by Bharat Biotech) to the U.S. market, investors think it will manage to profit from the global race to end Covid-19. However, after surging as much as sixtyfold from its December prices, this stock (at $6.61 today) is gradually dipping back towards penny-stock status.
This really shouldn’t be a shock to anybody. With President Joe Biden mandating vaccine eligibility to all Americans starting Apr. 19, most of the country could be vaccinated in a matter of weeks. Meanwhile, Ocugen is only now submitting its request for U.S. Food and Drug Administration (FDA) approval.
Sure, this doesn’t preclude the company from generating some revenue for the vaccine, assuming it gets approval. But, it may be too little too late for OCGN stock. If the results fall short of prior expectations, this one of the Reddit stocks doesn’t have enough on its side to justify a buy.
Sundial Growers (SNDL)
Next up on this list of Reddit stocks is Sundial Growers. Hopes for U.S. federal pot legalization helped to send SNDL stock to the moon. But, as intra-party gridlock delays sweeping reforms, investors are starting to value this “also ran” Canadian cannabis company again on its fundamentals. And that’s not a good thing.
Why? Sundial may have cleaned up its balance sheet. However, this move to become debt-free came at the cost of heavy shareholder dilution. With the pot legalization catalyst more top of mind than valuation, Reddit traders didn’t seem to see it as a concern. Now, though, with the company issuing more stock in a heavily-dilutive transaction, even Sundial’s biggest bulls may be ready to concede that things have gotten out of hand.
Admittedly, much of the proceeds from its prior share offerings are still on its balance sheet. There’s enough cash in its coffers to partially back up the stock at today’s prices of around $1 per share.
Yet, don’t make any “margin of safety” assumptions here. Sundial could blow this money on an ill-timed acquisition. Or, it could plow it into organic growth initiatives that fail to deliver. As Reddit investors lose their interest in penny stocks and U.S. legalization fails to get into next gear, shares could continue to sell off from here.
Last up on this list of Reddit stocks, veterinary diagnostic-equipment maker Zomedica could eventually find success with its recently-launched Truforma platform. However, as I recently wrote, even runaway success won’t be able to justify ZOM stock at today’s valuation.
Why? Because this is more of a bet on today’s speculative investment trends rather than on Truforma becoming a billion-dollar product. And even buying this as a gamble on continued penny-stock bullishness doesn’t look like a winning trade.
Shares are still far away from their low of 6 cents. But, trending lower after hitting highs of $2.91 per share, this name looks like it could continue to slide.
What’s a reasonable valuation for Zomedica? It’s hard to say. A lot of that hinges on how much of the existing veterinary diagnostics market it captures. A lot of it also hinges on how fast this space grows in the coming years.
However, it likely won’t be for many years until any sort of “best-case scenario” fully plays out. It’s a long road ahead until this company even comes close to justifying its current $976 million market cap. With the shares barely above $1 today, the potential for a rebound is minimal.
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On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.