With the selloff in stocks since Thanksgiving, investors may be shopping for bargains on the stock market this holiday season. Scores of popular plays have been hammered down by fears of the omicron variant and possible hawkish fiscal policy from the Federal Reserve. There are plenty of names that are buys right now. Even so, there are quite a few former favorites that are clearly stocks to avoid right now.
It’s not necessarily because of their valuation. Some of these stocks do still sport premium valuations. Yet I wouldn’t say that’s their key issue. Instead, the reason to steer clear of these names is because of concerns with the underlying business. For example, some of these companies have problems with profitability. There are several high-growth companies that have questionable prospects when it comes to getting out of the red.
Along with this, there are a few once-popular stocks where, due to a lack of information, it’s hard to tell whether they’re a promising opportunity or a situation that will leave those buying the dip today holding the bag.
So, as investors dive back into names beaten down in recent weeks, which ones should you stay away from? Consider these seven, a mix of names that have been popular throughout 2021, as stocks to avoid:
- Vinco Ventures (NASDAQ:BBIG)
- Carnival (NYSE:CCL)
- Clover Health (NASDAQ:CLOV)
- DraftKings (NASDAQ:DKNG)
- MicroVision (NASDAQ:MVIS)
- Peloton (NASDAQ:PTON)
- Zomedica (NYSEAMERICAN:ZOM)
Stocks to Avoid: Vinco Ventures (BBIG)
Vinco Ventures, a digital holding company, was a popular play among Reddit traders a few months back. The attention was mostly due to its appeal as a short-squeeze play.
However, BBIG stock also caught investors’ eyes because of the potential of one of its key holdings — an indirect stake in Lomotif, a video sharing app that’s similar to ByteDance’s TikTok. In addition, it has exposure to the non-fungible token (NFT) trend through its spun-off unit, Cryptyde.
Trading for around $2.94 per share today, BBIG stock is down more than 75% from its high. Back in September, during its meme wave, it traded for as much as $12.49 per share.
It may seem “cheap,” especially given the big potential of its investments. Yet there is one big issue that makes Vinco Ventures a no-go when it comes to entering a position.
That would be the opaque nature of its corporate structure. As I discussed on Nov. 30, it’s tough to decipher Vinco’s balance sheet. Its main assets, such as Lomotif and another acquisition, AdRizer, are held through a 50/50 joint venture with Zash Global. The company said it would merge with this partner, but so far it has not closed on the deal.
This, plus its complex use of warrants and other convertible securities, makes it difficult to say whether BBIG stock is a bargain or overpriced at present levels. Until the situation becomes less byzantine, it’s best to stay away.
Since the start of the pandemic recovery a year ago, an increasing number of investors have been betting big on a CCL stock comeback. Like other leisure and travel stocks, shares in the cruise line operator were hit hard by the Covid-19 outbreak.
With hopes for a full “return to normal,” many saw the opportunity to buy it for $20, $25 or even $30 per share. Carnival eventually returned to pre-virus price levels above $50 per share.
However, it hasn’t exactly played out this way. First with the delta variant, and now with the omicron variant, Carnival’s timeline to “full steam ahead” has faced further delays.
Beyond just the issue of when its comeback will happen, there’s another problem. Said comeback appears to be already priced into the stock. Even if things get back to normal this fiscal year (ending November 2022) and the company hits the top end of analysts’ earnings estimates, it trades at a forward price-to-earnings (P/E) ratio around 22x at its current price of $19 per share.
That’s at the high end of his historic valuation. To top it all off, the company’s balance is a lot more levered now than it was pre-Covid. Although it may look tempting to buy it as omicron fears fade, it may be best to wait until more uncertainty gets priced-in before buying.
Stocks to Avoid: Clover Health (CLOV)
At about $4.60 per share today, former meme favorite Clover Health is now a penny stock. Granted, this by itself doesn’t indicate whether you should be bullish or bearish on it. However, if you take a closer look at the details, it’s easy to see why I’m adding it to the list of stocks to avoid.
The company, which markets Medicare Advantage plans online, continues to see big revenue growth. In short, it’s not having trouble gaining customers and beating “old school” Medicare Advantage providers by building a better mousetrap — its Clover Assistant platform.
So, what’s the big issue here? Clover Health’s biggest challenge is controlling its costs. As seen from its medical cost ratio (MCR) numbers, it’s still paying out more in claims than it’s taking in from premiums. The company has claimed this is a product of patients utilizing their plans more in 2021 than they did in 2020 due to pandemic-related lockdowns.
Still, even if Clover Health manages to get its MCR down well below 100%, it may need a much greater increase in revenue in order to cover its high fixed operating expenses. It’s still murky as to when it will move from red to green. Even if you are more confident than I am when it comes to this healthcare “disruptor” finally getting over its current headwinds, there’s no rush to go out and buy CLOV stock.
Down more than 50% since September, DKNG stock may look like a “can’t miss” wager right now. But as my InvestorPlace colleague Mark Hake recently argued, the sportsbook operator continues to post heavy losses as it spends on marketing and promotions to entice bettors onto its platform.
Sure, you can argue that it’s laying out big money down to gain a massive customer base. But if the competition continues to heat up, DraftKings could operate in the red for the foreseeable future. Unable to take its foot off the gas, the company would still post heavy losses due to high marketing and promotion costs.
Additionally, investors continue to give DKNG stock a very high valuation. Shares currently trade for 11.6x this year’s projected sales of $1.26 billion and 6.9x projected sales of $1.88 billion for 2022. With its potentially flawed business model and frothy forward multiple, famed Jim Chanos is betting big against it, as he recently revealed on CNBC.
There may come a time where DraftKings is a lock. Now, however, is not that time. Until it either scales up to the point where marketing costs are manageable or starts cutting them (which admittedly could limit growth), it’s best to sit on the sidelines.
Stocks to Avoid: MicroVision (MVIS)
As you likely know, after announcing its move into the lidar business, this former penny stock became a meme stock. Between December 2020 and April 2021, MVIS stock went up from $2.80 per share to a high of $28 per share.
But as the meme stock phenomenon faded and more investors became skeptical this company would become the next Luminar Technology (NASDAQ:LAZR), the stock has given back a large chunk of its gains. It now trades for around $7 per share. It also hasn’t helped that investors have become less bullish on lidar stocks in general.
Lidar technology, which is used to facilitate self-driving and advanced driver assistance systems (ADAS), stands to see growing usage in the years ahead. But investors got a little ahead of themselves. They priced in too much of the industry’s potential too soon with several lidar plays.
That said, the larger concern with MicroVision isn’t uncertainty over when it’s going to start getting partnership deals like its established rival Luminar. In an October interview with InvestorPlace Market Analyst Joanna Makris, CEO Sumit Sharma expressed confidence in his company’s ability to find success in the lidar industry. But until more details and developments come out, this is one of many former meme stocks to avoid.
Already struggling due to investors cycling out of pandemic plays, PTON stock went into freefall in early November after reporting disappointing quarterly numbers and cutting its full year-guidance.
Shares in the at-home fitness company have since bottomed out. Perhaps this was due to hopes that the omicron variant would mean a return to the trends that put Peloton on the map in 2020.
Yet while it trades at just a fraction of where it was at the start of 2021, that doesn’t mean it’s wise to buy PTON stock simply on the hopes of a stunning recovery in 2022.
As our Louis Navellier recently argued, the company’s game plan to return to its former glory looks anything but surefire. Its price cutting efforts could negatively affect the company’s image as an exclusive, premium brand. New product launches, such as its strength-training-focused Peloton Guide, are entering a much more crowded market.
Although Covid-19 might not be going anywhere and could become an endemic virus, fitness enthusiasts are learning to live with it and aren’t putting off going back to the gym.
Pelton knows full well it needs to resolve its key issue: slowing growth. Even so, becoming a high-growth company again is going to be easier said than done. Unless it falls to a price more reflective of its long-term growth prospects, stay away.
Stocks to Avoid: Zomedica (ZOM)
At around 37 cents per share today, ZOM stock is still up big over the past year. Yet that fact is cold comfort to speculators who got into this during its early-2021 meme stock rally. At the time, shares in the veterinary healthcare equipment maker zoomed to as much as $2.91 per share.
Of course, rationality eventually set in, sending the stock down more than 86% from its highs. Some risk-hungry investors may see this as a sign that now’s a great time to enter a position. Believing Truforma is a high-potential product, they see its beaten down stock price as a situation where the risk/return ratio is in their favor.
Yet before you put in a buy order, there’s a major issue with the company to keep in mind. It had a slow start rolling out Truforma. Why? Mainly, the problem isn’t with the device. Instead, it’s with the assay cartridges used with it. Earlier this year, Zomedica faced delays getting assays from its third-party supplier.
The company leans heavily on its Customer Appreciation Program, or CAP, where it provides the Truforma device to end-users who then buy cartridges from the company. With that context, it’s no shock sales have been slow to take off. Burning through cash in the meantime, it still believes it will find big success with this product.
It’s best to avoid ZOM stock right now, as its story seems less likely to play out.
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On the date of publication, Thomas Niel 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.