Broader markets have been making record highs in April. However, as a busy earnings season gets underway, many investors might consider taking some money off the table, and decreasing their exposure to risky names. Such stocks might come under increased pressure if their financial metrics fall short of expectations. Therefore, today, we introduce seven risky stocks that could cool off in the rest of the year.
About a year ago, in the early days of the pandemic, many companies were caught off guard. But since then, investors have bet the economy will return to normal sooner than later. As a result, momentum, instead of financial metrics, have provided the catalyst for the increase in prices.
Yet, the earnings season typically means increased choppiness in the markets. Investors take time to analyze a given company’s fundamentals against expectations. Right now, valuations are frothy for many businesses. A large number of firms have borrowed heavily to stay afloat during the pandemic. Other new business, such as electric vehicle (EV) names, are pre-revenue companies without the prospect of income any time soon. On the other hand, some have been riding the optimism of policies that might come with President Joe Biden’s administration (such as pot names).
Therefore, April might become the quarter when investor optimism regarding a number of stocks falter, especially if their fundamental numbers do not match the Street’s forecasts. Against that backdrop, here are seven risky stocks to keep an eye on for today:
- Carnival (NYSE:CCL)
- Cerner (NASDAQ:CERN)
- Fisker (NYSE:FSR)
- GameStop (NYSE:GME)
- Groupon (NASDAQ:GRPN)
- Tilray (NASDAQ:TLRY)
- Yalla (NYSE:YALA)
Risky Stocks: Carnival (CCL)
52-week range: $11.00 – $30.63
Year-to-date (YTD) price change: 26.13%
First on my list of risky stocks is CCL. As the largest cruise company worldwide, Carnival has close to 100 ships that are ready to welcome guests when cruises are allowed to sail the high seas again. Prior to the pandemic, in 2019, around 13 million guests sailed with Carnival.
According to Q1 metrics of April 7, adjusted net loss was $2 billion. The company finished the quarter with $11.5 billion of cash and short-term investments. Management highlighted the fact that several of its European cruises are expected to start limited operations in the summer.
Yet, the cruise operator is unlikely to generate significant revenue in the rest of the world, especially in North America, for months to come. The U.S. Centers for Disease Control & Prevention (CDC) currently has a Conditional Sailing Order (CSO) in place through the beginning of November. As a result, cruises will not likely start this summer, either.
Many other countries have similar bans. For instance, Canada has banned all cruises in Canadian waters through the end of February 2022, which means Alaska-bound cruises cannot take place, either. However, summer months are extremely important for cruise operators.
Put another way, despite the pent-up demand, the industry cannot expect to recover in 2021. In fact, given the news of a potential third wave in the pandemic, Carnival is unable to predict when the entire fleet will return to normal operations. And yet, CCL stock has soared over the past year. I expect the shares to be choppy in Q2. A potential decline toward $23 would make the risk-reward profile more attractive.
52-week range: $63.11 – $84.20
YTD price change: -5.1%
Dividend yield: 1.18%
Kansas City, Missouri-based Cerner is a leading supplier of healthcare information technology (IT) solutions. It also offers an integrated clinical and financial system to help manage day-to-day revenue and operational functions.
Cerner released its Q4 2020 financials on Feb. 10. Revenue was $1.442 billion, a decline of 3%. The bottom line was up 1.7% year-over-year (YoY) and came at $241.2 million. Diluted earnings per share (EPS) grew by 4% YoY to 78 cents. As of year-end, free cash flow stood at $396 million.
CEO Brent Shafer cited “Cerner’s fourth quarter results reflect a very solid finish to the year. … As a result of our progress in 2020, we enter 2021 well-positioned to deliver increased value to our clients while also driving profitable growth for shareholders.”
The company expects to generate between $1.37 billion and $1.42 billion in revenue in Q1 and between $5.75 billion and $5.95 billion in 2021. While diluted EPS guidance for Q1 is in the range of $0.72 to $0.76, the company expects to achieve between $3.10 and $3.20 diluted EPS for the full year.
Cerner shares are trading at a forward price-to-earnings (P/E) ratio of 22.9. Its price-to-sales (P/S) ratio stands at 4.09. By historical standards, this is an expensive valuation level. The company would need to grow revenue, income and margins to sustain the current price level. Yet, the hospital space has become competitive with a number of entrants. Interested investors might want to wait for a potential decline toward $67.
52-week range: $8.70 – $31.96
YTD price change: -10.85%
Manhattan Beach, California-based Fisker is a risky name among auto stocks. It began trading in October 2020, following a reverse-merger with Spartan Energy Acquisition Corp., a SPAC at the time. Fisker’s business model involves designing EVs.
In other words, the company leaves the manufacturing to other companies with more know-how and scale capability. At this point, Fisker has no revenue. 2020 became the year when EV makers and alternative energy stocks soared, regardless of their business models or financial realities. Consumers worldwide are becoming increasingly environmentally conscious. Meanwhile, governments are encouraging green businesses.
But with a market cap of $3.3 billion, FSR stock is a speculative play in the competitive EV space. The Fisker Ocean, an electric sport utility vehicle (SUV), might be available in two years. It plans to offer a $379-per-month lease package that includes all maintenance and servicing. Until then, the group will likely keep burning cash.
Analysts believe Fisker’s proposed asset-light model will bring both advantages and disadvantages. Yet, other than the Ocean model, there is no possibility to generate revenues under the current strategy. Any hiccup in the production or delivery of the model will mean headwinds for the shares, making it a clear choice for this list of risky stocks. As a result, FSR stock is likely to be volatile in the coming months, at least until we have more visibility from the company. A potential decline toward $10 is possible.
52-week range: $3.77 – $483.00
YTD price change: 722.35%
Grapevine, Texas-based GameStop is a multichannel video game and consumer electronics retailer. It sells new and second-hand video game hardware, physical and digital video game software, and video game accessories, mainly through stores and international e-commerce sites both in the U.S. and globally.
As most InvestorPlace.com readers are well aware, this risky stock has been making regular headlines with its short-squeeze potential. Reddit traders have been on a relentless task to go against various hedge funds for shorting GME stock. At the end of January, the shares hit a record high of $483. Now, they’re hovering around $150.
On April 5, the company announced preliminary unaudited sales results for the first nine weeks of FY21. Accordingly, in the first four-week period of this year (i.e., in February), GameStop’s total sales increased 5.3% YoY. In March however, sales grew by 18% YoY, which brings cumulative nine weeks’ YoY growth performance to 11%. It is important to remember that during Q1 2020, its operations were negatively impacted by the temporary store closures.
The rollercoaster ride in GME stock has been exciting to watch, and the company has a massive following among retail investors. But going forward, fundamental drivers are likely to determine the price, as Reddit traders could potentially take their collected short-squeeze efforts to another name. The market capitalization stands around $10.7 billion. The share price is expensive for such a valuation. The market would need to see management taking steps to grow revenues significantly before a new leg up can begin in GME shares.
52-week range: $14.95 – $64.69
YTD price change: 32.48%
Next on my list of risky stocks is Chicago, Illinois-based Groupon. The company acts as the intermediary between consumers and merchants, offering a variety of deals on products and services. It generates 40% of its revenue from the take rate on the purchase the vouchers sold. The rest comes from direct sales. Around 60% of Groupon’s revenue is from North America.
At the end of February, the company announced Q4 and 2020 financial figures. Q4 revenue declined by 44% YoY to $343.1 million. Non-GAAP net income was $15.1 million, or 51 cents per diluted share. A year ago, the metrics had been $44.6 million, or $1.44 per diluted share. As of year-end, cash and equivalents recorded were $850.6 million. Management pointed out the adverse effects of the pandemic on the results.
CFO Melissa Thomas stated, “The Groupon team continued to deliver improving financial results in the fourth quarter, including sequential adjusted EBITDA growth, positive free cash flow and a cash balance of $851 million.” Following the release of the results, the company held an earnings call in which they revealed 2021 guidance.
Accordingly, for the full year of 2021, Groupon expects the recovery to be weighted toward the second half of the year. The company expects to generate between $930 million and $980 million revenue (vs. $1,417 million of 2020) and $100 million and $110 million adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) versus $49.8 million in 2020.
GRPN’s forward P/E stands at 140.85. Groupon was one of the first names in the deal voucher segment, used mostly by price-sensitive customers. However, since then a number of competitors have also entered the space, squeezing margins. Furthermore, in the past decade many small and local merchants have increased their own marketing efforts to reach consumers directly. Unless management can increase revenues, the shares will likely decline. Potential investors would find better value below $40.
52-week range: $4.41 – $67.00
YTD price change: 104.12%
Canada-based cannabis producer Tilray has been in the limelight. In mid-December, the group announced an upcoming merger with another Canadian marijuana business, Aphria (NASDAQ:APHA). The combined company will become the largest cannabis group worldwide, based on pro forma revenue. The news pushed TLRY stock to a 52-week high of $67 in February. However, since then, risk appetite has declined, and the share trades around $17.
Tilray released Q4 and 2020 year-end financial results in mid-February. Revenue was $56.6 million, an increase of 20.5% from the fourth quarter of 2019. Net loss was $3 million, or 2 cents per share. A year ago, the comparable numbers were a net loss of $219.8 million and $2.14 per share.
Although the metrics showed increased revenue in the company’s cannabis segment, analysts concur that neither the Canadian recreational/adult segment nor the international or Canadian medical segments are large enough to provide further sustained support to the stock price. As a result, investors have hit the sell button.
After the U.S. presidential election in 2020, marijuana stocks made the news as their prices jumped fast. But volatility has returned as the Street questions whether U.S. legalization is indeed in the cards any time soon. Therefore, more price swings in most pot names, including TLRY stock, is likely. Clearly, pot stocks will continue to be among the risky stocks going forward. Interested investors should regard declines toward $15 or below as better entry points.
52-week range: $6.26 – $41.35
YTD price change: 57.41%
Our final company on this list of risky stocks comes from the MENA (Middle East and Northern Africa) market. Dubai-based Yalla is a social networking and entertainment platform from the region. The company went public less than a year ago.
On March 15, Yala released financial figures for Q4 and FY 2020. Quarterly revenue was $48.3 million, representing a 150.9% YoY growth. Non-GAAP net income was $23.3 million in Q4, a 181.6% YoY increase. As of 2020 year-end, Yalla had cash and equivalents of $236.9 million.
About 90% of Yala’s revenues comes from chatting services (i.e., its voice-centric social networking application). Mobile games (i.e., Yalla Ludo) provide the rest of the revenue.
CEO Yang Tao stated, “Driven by the better-than-expected performance from our chatting services, we are pleased to report a sequential quarterly revenue increase and exceeding the upper end of our guidance range.” For Q1 FY21, the company expects revenues to be in the $60 million to $63 million range, which means growth of 184.7% to 198.9% YoY.
Forward P/E and P/S ratios stand at 32.15 and 15.54, respectively, and the market cap is $3.3 billion. Given how far the shares have come in a year, some investors will likely take profits soon. Meanwhile, we are likely to see established social networking giants put more emphasis on the MENA market, too. Therefore, increased competition is potentially in the works. A decline below $20 would make the shares more appealing.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.