Call them sucker stocks, stocks to avoid or whatever you’d like. Regardless of how they’re categorized, there are some companies investors should stay far away from right now.
A few of the companies on this list look bad because of the pandemic. Some weak electric vehicle (EV) companies also make an appearance, along with some SPACs.
Regardless of potential catalysts, all of these stocks have huge weaknesses that can easily tank share prices. Investors should steer clear of these seven stocks right now:
- Workhorse (NASDAQ:WKHS)
- Lordstown Motors (NASDAQ:RIDE)
- American Airlines (NASDAQ:AAL)
- Clover Health (NASDAQ:CLOV)
- AMC (NYSE:AMC)
- Canoo (NASDAQ:GOEV)
- Wells Fargo (NYSE:WFC)
Stocks to Avoid: Workhorse (WKHS)
I really wanted Workhorse to succeed. When I wrote about the company over the past year, I liked it because it tried to differentiate itself from the start. Rather than compete with other passenger vehicle upstarts, Workhorse focused on electric delivery vans. The company looked like it could carve out its niche in the red-hot EV space.
Most notably, Workhorse was one of three finalists considered for a massive fleet replacement contract from the United States Postal Service (USPS). EV enthusiasm coupled with the potential USPS award brought shares up to the $40 range by February.
But neither of those catalysts were meant to be permanent. The EV bubble burst in February. Then later in the month, USPS awarded its fleet replacement contract to Oshkosh (NYSE:OSK). WKHS stock prices fell off a cliff on that news.
Workhorse has filed a legal challenge to the USPS award, but that will be a long and likely fruitless battle.
Somewhat surprisingly, WKHS stock still has an “overweight” rating on Wall Street. The stock is very much a short squeeze target — more than 36% of WKHS shares are currently sold short. That might propel their price sky high, but in my opinion, the stock isn’t worth chasing.
Lordstown Motors (RIDE)
Lordstown Motors is intimately tied to Workhorse, which owns 10% of the EV manufacturer and has a technology licensing agreement with the company.
Lordstown Motors’ Endurance truck is based on an earlier Workhorse design. The latter company will make 1% on each of the first 200,000 Endurance trucks sold. Workhorse is also entitled to 1% of any debt or equity financing that Lordstown Motors raises.
That connection aside, investors should be very wary of RIDE stock simply because the company is losing lots of money. In 2021, Lordstown Motors reported a first-quarter net loss of $125 million. The company expects its capital expenditures to be as high as $275 million in 2021. It also anticipates that operating expenses could total $350 million for the year.
That amounts to $625 million out the door. If that turns out to be true, Lordstown Motors’ $587 million in cash on hand could theoretically disappear. On top of that, the company faced the loss of its CEO and CFO. And currently, SPACs are not as well-received by the markets as they were six months ago. None of these factors point to a stock that investors should be placing their money into.
Stocks to Avoid: American Airlines (AAL)
For readers who paid attention to the Covid-19 pandemic’s impact on airline stocks, American Airlines likely stands out. Unfortunately, it stands out for the wrong reasons.
Many pundits scrambled to understand which airline among the big U.S. carriers would fare best. American Airlines’ size and relative financial weakness made it a stock to avoid when compared to Delta (NYSE:DAL), United Airlines (NASDAQ:UAL) and Southwest (NYSE:LUV).
It is also clear that Delta and Southwest fared much better throughout the pandemic. Their stocks have seen a much better recovery from their March 2020 losses than AAL stock.
Some might argue that American Airlines — and United Airlines by extension — should rise on increasing travel volume. I wouldn’t follow that logic. They are laggards because they were weaker going into the pandemic.
American Airlines will remain weaker than its competitors for a long time to come. The company lost $9.5 billion in 2020. The effects of that loss will slowly trickle down through AAL stock, which will reel for the foreseeable future.
Clover Health (CLOV)
Clover Health is one of several offshoots of Chamath Palihapitiya, the so-called “SPAC King.”
Palihapitiya is a divisive figure to say the least. Regardless of whether you believe he’s a brilliant investor or a shrewd conman, one thing is for sure: He knows how to make money. Palihapitiya has been flirting with — and occasionally exceeding — a net worth of $1 billion as his SPAC deals make him money hand over fist.
However, his SPACs’ returns are much less inspiring, and Clover Health is one of Palihapitiya’s least successful ventures. Since going public in June last year, CLOV stock is only down marginally. It began trading above $10 and now trades at $9. But in my estimation, there’s little to like about the healthcare company.
I recently wrote about my visceral feeling regarding Clover Health’s increasing losses. Management is implying that the company will turn a corner soon, but the reality looks starkly different. Here’s what I said about CLOV stock earlier this month:
“The company expects that its EBITDA loss of $76.2 million in Q1 2021 will only end up equating to between a $190 million and $240 million EBITDA loss for the year. But if Clover simply continued at $76.2 million per quarter, we would reasonably expect that loss to be a bit over $300 million. So, the company clearly is implying that everything will turn around and EBITDA losses will decrease quickly. However, this seems unlikely if we are to take the past as prologue.”
Nothing has changed since then to indicate that Clover Health can improve from here. For now, investors should keep CLOV shares on their list of stocks to avoid.
Stocks to Avoid: AMC Entertainment Holdings (AMC)
The main argument driving investment in AMC stock is that a short squeeze will send it to the moon. But that argument is false — if you follow the numbers, that action has likely already passed.
Short interest in AMC peaked in late May and early June. At the time, 102 million of AMC’s 499 million shares were sold short. Share prices jumped from the teens to $60 in a few days. That was enough to send AMC stock skyward.
Short interest now sits around 17%. Perhaps it’ll rise into a range that could trigger another squeeze, but the risk is severe.
Sooner or later, AMC stock will fall into the single digits based on its fundamentals. The company was in big trouble long before the pandemic shuttered movie theaters, and will remain in big trouble once movie theater attendance returns to pre-pandemic levels.
AMC incurred a $2.176 billion loss in Q1 of 2020. There was nothing to suggest anyone should have invested in the company then, and there’s even less to suggest that now. AMC has responded to the unprecedented enthusiasm for its stock as foundering companies do: It issued a bunch of shares to raise capital.
Investors who jump into AMC stock now face a double-edged sword of risk: Share price dilution in the longer term, and the ever-present risk that shares start trading in the teens again.
The only reason to consider GOEV stock right now is to play its short squeeze potential. Right now, 26.8% of its float is sold short. But as you can probably guess, I think buying GOEV shares is an unwise proposition.
Canoo is one of several EV SPACs that went to market in 2020. Since then, interest in the sector has waned. The company even finds itself the subject of an SEC inquiry as to whether it misled investors.
Even if nothing materializes from the investigation, Canoo may be in trouble. Frankly, it feels like the company is quickly becoming an also-ran rather than a viable competitor in the EV space. I can’t imagine a reasonable scenario in which investors buy GOEV shares instead of successful EV manufacturer stocks.
Chinese electric vehicle manufacturers are particularly compelling right now. Nio (NYSE:NIO) and XPeng (NYSE:XPEV) are light years ahead of Canoo and continue to post strong delivery figures. In the U.S., Tesla (NASDAQ:TSLA) and legacy auto manufacturers are releasing EVs as well. I see no place for Canoo to chip away at any of this.
Stocks to Avoid: Wells Fargo (WFC)
Wells Fargo is no stranger to controversy. The high-pressure sales environment that led to fake account creation and multiple other infractions caught up to Wells Fargo in the early 2010s. The brunt of the blame was placed on upper management, but the damage was already done. Wells Fargo lost its trustworthiness. This was no small blow for a Main Street bank with such a long history.
Wells Fargo is supposed to be the bank for the little guy, but the company is quickly burning those bridges. The company will begin shutting down all existing personal lines of credit in the coming weeks.
As a result of the scandal, the bank is barred from growing its balance sheet until it becomes compliant with regulations. Therefore, Wells Fargo is reducing its asset cap and existing personal lines of credit.
By one line of logic, the bank should shed higher-risk assets from its balance sheet. However, I don’t buy that. The truth is that Wells Fargo only has to shed these assets because of its own mistakes. If it were compliant in the first place, it wouldn’t have the asset cap that it currently does.
The ultimate disservice of Wells Fargo is this: The lines of credit that will be shut down may affect users’ credit scores. The bank’s latest move shows it is anything but Main Street.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.