It may be too early to say that a stock market correction is just around the corner. Markets may be able to withstand the delta variant of Covid-19. Yet other possibilities in the near term, such as America’s post-pandemic economic hitting a wall, or the recent rise in inflation ending up being more than “transitory,” could have a negative impact on equities. So, ahead of a correction, meltdown, or sell-off, what are some top stocks to avoid?
How about popular stocks? This includes many of the meme stocks sent “to the moon” by Reddit traders. But it also encompasses many richly priced, high-growth names that have performed well since the start of the pandemic, yet could see significant pullback due to multiple compression.
That is not to say these types of stocks no longer stand to become long-term winner. It’s just that, with the possibility of stocks experiencing a double-digit decline, you may be able to enter/re-enter them at a more favorable entry point soon down the road.
So, what are some of the top popular stocks to avoid? Or, if you own them now, cash out as soon as possible. Consider these seven, meme stocks and non-meme stocks alike, names to stay away from for now:
- AMC Entertainment (NYSE:AMC)
- Clover Health (NASDAQ:CLOV)
- Nio (NYSE:NIO)
- Palantir (NYSE:PLTR)
- Peloton (NASDAQ:PTON)
- SOS Ltd (NYSE:SOS)
- Virgin Galactic Holdings (NASDAQ:SPCE)
Stocks to Avoid: AMC Entertainment (AMC)
Its popularity among Reddit traders may be waning. So far, though, AMC Entertainment shares have managed to hold onto the majority of its meme stock gains. It’s down more than 56% from its 52-week high of $72.62. But at $31.75 per share, it’s still up a staggering 1479.6% since the start of 2021.
That being said, don’t expect shares in this movie theater chain to remain resilient from here. Like with GameStop (NYSE:GME) stock, Main Street investors may have clobbered Wall Street short-sellers in this name earlier this year. But the short side may be coming back with a vengeance. Even legendary short seller Jim Chanos has decided to take a shot at betting against AMC stock.
Worse yet, this time, the so-called smart money could prevail against the r/WallStreetBets community. The overall meme stock trend has lost momentum, as it’s failing to expand the pool of investors willing to use its counter-intuitive yet once highly-profitable strategy. Without investors buying it on hype and momentum, it’ll continue to trade more on its fundamentals, which Chanos himself have said are deteriorating, as movie theaters are struggling to recover from Covid-19.
Add in the fact the stock would still be pricey at between $10 and $15 per share, and a possible correction making even those still holding it with diamond hands skittish. More at play to sink it than send it bouncing back, consider AMC one of the top stocks to avoid right now.
Clover Health (CLOV)
Clover Health was one of the top-performing names during the second meme stock wave in late May and early June. Primarily, due to hype at the time surrounding its ability to get short-squeezed. More than two months back, it may have gone parabolic, surging from around $7 per share, to as much as $28.85 per share.
But as investors have given up on this angle, shares in the insurtech company trying to disrupt the Medicare Advantage business are back to around $8.40 per share. Even worse? Further declines may be on the way.
Why? There’s a good reason why CLOV stock has been so heavily shorted. First, the red flags surrounding its business model. These were detailed in Hindenburg Research’s scathing “short-report” earlier this year. Second, concerns that its business model will not prove successful in the long term. This is due to its growth plateauing sooner than expected. Or, its financial performance (which has already disappointed Wall Street analysts), will be continuing to underwhelm.
As its floundering while markets remain strong, you can imagine its possible downside if stocks in-general enter bear-market mode within the next few months. Ahead of Clover heading to even lower lows, it may be best throw in the towel if you own it, and steer clear if you do not.
Stocks to Avoid: Nio (NIO)
Lately, renewed interest in EV (electric vehicle) plays has helped to counter rising China regulatory crackdown fears when it comes to NIO stock. Yet there are some other factors that could put even more pressure on shares in the luxury EV maker, located in what’s become the world’s largest electrified vehicle market.
Namely, it’s still-stretched valuation. As InvestorPlace’s Will Ashworth recently wrote, Nio continues to be priced based on very optimistic delivery growth projections. The implication? Shares could sell off, if its delivery numbers and financial results end up falling short of expectations. Trading for around 13.2x projected 2021 sales, it needs to continue growing at a very high rate to remain at, or move above, today’s prices (around $40 per share).
But even remaining firmly on the growth train may not be enough to prevent this high-flyer from experiencing multiple compression, if that starts to happen going forward due to inflation/interest rate worries. Like with many overvalued growth stocks, shares could experience a high double-digit decline, and still sport a premium valuation.
Investors who got into this at around $3 per share, before the EV bubble emerged in mid-2020, have seen tremendous trading profits. Yet investors buying it today, or who have bought it anytime this year? They may be at risk of heavy losses, if they decide to hold instead of selling now.
As I recently put it, Palantir is a wonderful company, but its stock is trading at an inflated price. That is, it makes sense why investors are bullish on this big data play. It continues to have big advantages when it comes to obtaining contracts with agencies of the U.S. federal government.
Growing its client base in the private sector has so far been a work-in-progress. But that could soon change. As a Seeking Alpha commentator recently broke it down, the company’s commercial sales growth may be set to accelerate.
The problem? That’s more than accounted for in the PLTR stock price. Trading for a forward price-to-earnings, or P/E, ratio of 157x, this is a prime example of a priced for perfection situation. Yet just like with some of the other promising growth plays discussed in this gallery, meeting expectations by-itself may not be enough to keep shares from holding steady, much less help shares rally higher, from here.
Putting it simply, this is another situation where multiple compression could result in a big declines. Shares could fall 50%, and still trade at a valuation that more than reflects its growth prospects. It may have a high quality underlying business. But don’t leave yourself exposed to holding the bag. Avoid Palantir stock.
Stocks to Avoid: Peloton (PTON)
Starting in June, the delta variant’s spread has given investors hope that stay-at-home-economy winner PTON stock could continue to stay winning. Other factors, such as UnitedHealthcare (NYSE:UNH) announcing it will provide millions covered by its health insurance policies with free access to the company’s fitness class subscription service, have helped to boost shares in the at-home fitness company as well.
However, these positive developments far from insure Peloton doesn’t continue to give back more of its pandemic-related gains. Also a stock trading for a triple-digit P/E ratio (127x estimated earnings for its fiscal year ending June 2023), multiple compression risk runs high with this name too.
Not only that, as InvestorPlace’s Alex Siriois recently made the case, it’s up for debate whether it’ll continue to see above-average growth thanks to delta and subsequent Covid-19 variants. This may mean sales growth with its stationary bikes and treadmill equipment, and more importantly, subscriber growth for its high-margin connected fitness classes, falls short of expectations.
In turn, it’ll be tough for PTON stock to keep on sporting a P/E ratio north of 100x. With both company-specific and market-wide risks potentially sending it crashing down, there’s no need to buy or hold this still-popular stock right now.
SOS Ltd (SOS)
Even as Bitcoin (CCC:BTC) makes a recovery, it’s best to stay away from SOS stock. Why? Among the many publicly traded companies in the business of crypto mining, this may be the riskiest. As you may recall, this was another popular stock targeted by vocal short-sellers earlier this year.
Hindenburg Research, along with a lesser-known short research outfit (Culper Research), each released to investors a laundry list of red flags with this China-based Bitcoin miner. Mostly, concerns that not everything was on the up-and-up with the company.
SOS responded within a few weeks, with a press release that attempted to assuage concerns raised by both short reports. Yet, while the allegations made could have been overblown, there’s still a lot of questions surrounding this company. It hasn’t been the most timely when it comes to releasing financial results. Also, little has been said about the impact of China’s crypto crackdown (which may result in a ban on mining within its borders) on the company’s operations.
Crypto mining plays may have further upside, given BTC could be making its way back to its high water mark. But with plenty of options out there from exposure, including Marathon Digital (NASDAQ:MARA), Riot Blockchain (NASDAQ:RIOT), and Support.com (NASDAQ:SPRT), there’s little reason to choose much riskier SOS stock as your way to play a rebound in crypto mining.
Stocks to Avoid: Virgin Galactic Holdings (SPCE)
Richard Branson, the public face of Virgin Galactic, may have successfully gone up into space last month on one of the company’s rockets. It’s making progress for sure. But don’t see this as a reason to buy its stock following its recent pullback.
Falling from around $49 per share just before Branson’s launch, to around $25 recently, SPCE stock may look like a solid buy-the-dip situation. Yet it’s important to remember that the company remains many years of turning its business model inspired by science fiction into economic reality.
With only more test flights planned in the immediate future? It’s still going to take time before the company starts making money from its out-of-this-world operations. That’s along with the fact that tickets today sell for $450,000 a pop. Eventually, this ticket price will come down. But don’t expect to happen on a time-frame short enough to allow it to grow into its $7.5 billion valuation.
To top it all off, it a market correction and/or if multiple compression happens? Shares could make a fast ascent back to Earth. If you are bullish on space, there are scores of other plays you can buy. Stick with them, and hold off on SPCE stock.
On the date of publication, Thomas Niel held a long position in Bitcoin. He 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.