Penny stocks are enticing as they offer prospects of multibagger returns. High degree of speculation across penny stocks is another reason that makes it attractive for investors. Big trading gains are a possibility at the blink of an eye. However, amidst the ocean of names, there are penny stocks to avoid as they can continue to trend lower.
It’s important to mention that among penny stocks, there are non-speculative stories. These stocks have strong fundamental support, making them a wise investment. There are purely speculative penny stocks that have high risk. Once the euphoria dies, these penny stocks erode wealth.
This column discusses the penny stocks to avoid even after a significant correction. I believe these stocks can continue to trend lower because of sustained weakening in fundamentals.
Let’s discuss the reasons that make these penny stocks worth avoiding.
Electrameccanica Vehicles (SOLO)
Electrameccanica Vehicles (NASDAQ:SOLO) stock has been in a downtrend with a correction of 69% in the last 12 months. The electric vehicle stock is among the penny stocks to avoid.
One reason is that competition has significantly intensified in the EV space. It seems difficult for a small player to survive and the company’s EV model has failed to generate interest among consumers.
As an overview, the company is in the selling of single-seater vehicles. This is a differentiating factor coupled with a low minimum selling price. However, for Q3 2022, Electrameccanica sold 64 vehicles. Vehicle deliveries were lower, which is disappointing.
The company reported revenue of $1.44 million. The scaling-up of business seems questionable considering the lukewarm response. Electrameccanica reported $173 million in cash.
However, I don’t expect the company to turn cash flow positive soon. The risk of further dilution will also affect stock sentiment.
Aurora Cannabis (ACB)
Aurora Cannabis (NASDAQ:ACB) stock has plunged by 80% in the last 12 months. I would still stay away from ACB stock, which currently trades at 64 cents.
First and foremost, the cannabis industry continues to face legalization headwinds. There are better penny stock options for exposure to the industry. Some examples include Tilray Brands (NASDAQ:TLRY) and Curaleaf Holdings (OTCMKTS:CURLF).
For Q2 2023, Aurora Cannabis barely turned adjusted EBITDA positive. Tilray and Curaleaf have reported positive adjusted EBITDA on a sustained basis.
Tilray further expects positive free cash flow from all key business units in the current financial year.
Of course, Aurora has a healthy cash buffer of $310 million as of February 2023. However, regulatory headwinds have affected the scaling-up potential of the business. ACB stock downtrend indicates the point that the markets are discounting potential dilution or sluggish growth.
There might be a case for Tellurian (NYSE:TELL) trending higher in the long term. However, TELL stock is worth avoiding for the coming quarters.
An important point to note is that natural gas prices have declined with a warmer weather forecast for the U.S. This is one factor that’s likely to keep the stock depressed.
I must also mention that the markets have remained unimpressed with the company results.
For 2022, the company reported four-folds growth in natural gas production. For Q4 2022, production was 225 million cubic feet per day (MMcfd).
However, they expect no further growth in production for 2023. The company also ended the year with total assets of $1.4 billion, which includes $474.2 million in cash. The stock has however declined by almost 75% over a 12-month period.
By 2035, there is a case for LNG demand exceeding supply. Tellurian can therefore be on your investment radar, and I believe that the stock will be available at lower levels.
On the date of publication, Faisal Humayun did not hold (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.