Though most of us would like to forget last year, the novel coronavirus pandemic continues to impact our lives. The wounds caused by the tragedies in our society are still present as businesses look to recover and employees go back to their jobs. Every part of the stock market suffered heavily, from premium tech shares to obscure penny stocks.
However, the pandemic impacted certain sectors more than others. The bankruptcy rate in the retail sector reached an all-time high, and airlines suffered historic damage.
But some spectacular disappointments went far beyond any expectations in the biotech and energy space. Many of these companies struggled this year and will continue to do so for the foreseeable future. Unfortunately, they have contributed to the large list of companies that are bad stocks to invest in.
The issue is not the price momentum. It is the operating models that are contributing to the negative sentiment. These penny stocks could fall for said reasons, and investors should sell them before a market correction occurs:
- Invesco Mortgage Capital (NYSE:IVR)
- Sundial Growers (NASDAQ:SNDL)
- Naked Brand Group (NASDAQ:NAKD)
- iBio (NYSEAMERICAN:IBIO)
- Pennsylvania Real Estate Investment Trust (NYSE:PEI)
- ElectraMeccanica (NASDAQ:SOLO)
Penny Stocks: Invesco Mortgage Capital (IVR)
Invesco Mortgage Capital is a mortgage real estate investment trust, or REIT. These investment vehicles purchase, originate or buy mortgage-backed securities from banks, then resell them with interest earned on these investments. The wider the net interest margin, the more a company can offer better rates for loans and buy back more bonds.
Last year, Invesco Mortgage Capital did badly because it was making moves that were way too risky in a struggling economy. The mortgage-backed securities that Invesco had invested in were either guaranteed or backed by the government.
However, about one-quarter of its portfolio was non-agencies loans. The company’s collapse was nearly its end — the fall would have been even more devastating if it weren’t for broad-based government assistance.
The positive thing is that the REIT has changed course and is now investing in safer agency assets that sacrifice yield for default safety. However, in an economy that is still recovering, there are several tech stocks that warrant more attention.
Sundial Growers (SNDL)
One of the worst performers of 2020, Sundial Growers got a new lease on life courtesy of Reddit’s r/WallStreetBets. No one could have predicted the Canadian marijuana producer would be around by this time next year.
However, those things are part of the past. It has raised a lot of money from equity issues, and with a strong balance sheet and zero debt, things are looking up for the company.
Sundial Growers has also changed its strategy somewhat, focusing now on a two-pronged approach. It is still focusing on the cannabis business. However, a larger chunk of its business operations is now SunStream Bancorp, a unit focusing on investing in accretive business opportunities in the marijuana sector.
The recent quarterly results illustrate that this segment will be the lead revenue-earner moving forward. This asset-light business model could provide dividends in the future.
However, a larger issue needs tackling outside Sundial Growers’ control — the federal legalization of marijuana. Although Democrats control both the White House and Congress, decriminalization of marijuana is not a straightforward process.
Canadian cannabis companies are heavily relying on U.S. legalization to ensure their future profitability. Until that happens, it is tough to foresee a scenario where Sundial Growers is very successful.
Penny Stocks: Naked Brand Group (NAKD)
Reddit traders rescued several companies from bankruptcy. However, the most outrageous meme stock is not GameStop (NYSE:GME) or AMC Entertainment (NYSE:AMC). Despite divergent opinions, the companies have solid brand equity and can brand a new path for themselves.
The intimate apparel company Naked Brand, on the other hand, could still end up bankrupt despite getting a lot of money by tapping the equity markets after the Reddit-induced bonanza.
There is little connection between clean energy and intimate apparel. However, the stock popped on the announcement. Considering the Reddit crowd is still an investing force, there will be blips such as this along the way. It is unlikely, though, that Naked Brands can turn things around soon.
Several biotech stocks did very well during the pandemic. Every crisis is an opportunity in disguise, and many investors wanted to take advantage of the vaccine race.
Moderna (NASDAQ:MRNA), Pfizer (NYSE:PFE), BioNTech (NASDAQ:BNTX) and AstraZeneca (NYSE:AZN) emerged as clear winners. However, along the way, several obscure companies did well. iBio came to the fore after announcing IBIO-200 and IBIO-201, two vaccine candidates, very early in the game.
Shares skyrocketed to new heights. A similar rally was experienced in IBIO stock when the Ebola crisis struck in 2014. However, in both cases, it was close but no cigar.
Recently, the company made headlines after winning a case against Fraunhofer USA. The case centered around the latter’s use of iBio’s proprietary recombinant protein manufacturing technology. Upon settlement of the case, the company can use the technology and iBio will get the fees from issuing a license for its use.
As is customary with these announcements, the stock popped once the settlement was announced. However, it has no bearing on the long-term future of this biotech company. If you are looking for penny stocks to avoid, iBio makes it to the top of the list.
Penny Stocks: Pennsylvania Real Estate Investment Trust (PEI)
Retail was already struggling for survival when the pandemic hit. However, it is hard to pinpoint a more cataclysmic development for the sector than Covid-19.
Several prominent retail companies filed for Chapter 11 bankruptcy after the pandemic hit. Two mall REITs, including Pennsylvania Real Estate Investment Trust (PREIT), had to do so because they were unable to collect rent due to Covid-induced business closures.
PREIT quickly secured a restructuring support agreement with most of its creditors. As a result, they could file for bankruptcy, recapitalize their balance sheet and come out of Chapter 11 very quickly.
Through the process, the company has accomplished two tasks. First, PREIT has extended the maturity date on its debt, hoping that the broader economic recovery and its fiscal situation will improve enough to pay off the debt or refinance upon maturity.
Secondly, the company and its creditors have managed to recapitalize PREIT by offering $130 million in fresh capital. The injection of liquidity will give PREIT the funding it needs to continue operating and advance its strategic priorities. That includes a multi-year transformation plan that revitalizes properties in its portfolio into high-quality venues.
However, the REIT continues to struggle post-restructuring. That’s because PREIT’s approach to bankruptcy was a departure from the norm. Rather than reducing its total debt, it looked to increase liquidity and extend its debt schedule.
The reorganization plan led to unsecured debtholders getting secured debt. Suppose retail continues to struggle, or the delta variant becomes more severe. In that case, PREIT could end up filing for Chapter 11 again sooner rather than later, making it one of the penny stocks you need to sell immediately.
The Covid-19 pandemic resulted in several obscure companies doing well. One example is Candian electric car company Electrameccanica, which is currently changing hands for $3.85.
Almost a year ago, it was trading as high as $13.60. That is a steep drop. However, that doesn’t mean this is the ideal time to buy SOLO stock.
The company’s flagship product is the Solo, a three-wheeled electric vehicle that gained traction last year due to the pandemic. With most of the world under lockdown and people afraid to use ride-hailing applications, this concept intrigued investors.
Since only one person can use it — hence the name — investors felt it could offer some respite for people looking to travel safely. That and the general Tesla (NASDAQ:TSLA) euphoria led to some mind-numbing price multiples for this stock.
However, there are several disadvantages to this design as well. It cannot take advantage of the $7,500 federal tax credit for passenger vehicles because Solo is technically an electric motorcycle. Also, the American consumer likes pickup trucks, and the pandemic amplified the trend as some people moved to the countryside.
With these factors in mind, investors should sell their shares of SOLO stock.
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On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.