Penny stock investing isn’t for the faint of heart. These stocks can generate returns in a few days that exceed what popular index funds can do over the course of 5-10 years. However, many penny stocks can also go belly up and devastate long-term investors. While it is common to view penny stock as stocks under $5 per share, this article will include stocks valued below $10 per share.

If you want to invest in penny stocks, it’s important to look at unfavorable stocks. Knowing the elements of unprofitable penny stocks can tip you off on what to look for in promising investment opportunities. Investors can benefit from staying away from these three penny stocks.

Nikola Motors (NKLA)

Nikola Motors (NASDAQ:NKLA) is an easy target due to the founder’s sketchy history and the company’s pattern of deceiving investors about its technology. 

It continues to shock me that Nikola Motors is still a publicly traded company. It’s even more jarring that the company enjoyed a nearly 500% rally from June 1st to August 3rd. Reality eventually won over and shares have been down by 68% year-to-date.

Nikola Motors promised the world to investors. The company assured investors it could produce electric trucks on scale and revolutionize the entire industry. Companies that make these grandiose claims without a financially sound model should spook investors.

Nikola Motors shares almost touched $80/share in 2020. The collapse was dramatic and quick. Most traders know the company is on its way out but still trade it in the pursuit of short-term gains. Timing the market almost never works, especially for a company with an imminent bankruptcy.

AMC (AMC)

Movie theater chains have not been the same since the pandemic. Stocks like AMC (NYSE:AMC) have been struggling as fewer people are going to the movies. Movie attendance has not reclaimed 2019 levels and was down by 16% compared to those benchmarks. Revenue and EBITDA reached records, but that can also be a product of inflation pushing movie tickets higher. AMC still isn’t generating the same pre-pandemic demand.

To AMC’s credit, the company achieved impressive year-over-year revenue and earnings growth, but those numbers stack up against soft comps. Even though AMC’s financials are on the rebound, its significant debt is a huge problem. The gap between AMC’s market cap and enterprise value tells the story.

AMC has a $1.37 billion market cap which falls well below the company’s $9.96 billion enterprise value. Enterprise value is the sum of a company’s market cap and debt minus cash. The company’s debt exceeds its market value by a wide margin.

A higher market cap indicates a company has more cash than debt on its balance sheet. The EV/Market Cap ratio helps investors monitor the relationship between these metrics.

Nio (NIO)

Electric vehicle stocks were the big craze in 2020. Nio (NYSE:NIO) was one of the ringleaders for the trend. Traders who bought and sold their shares at the right time could have seen their investment go up by over 2,000% in less than one year. The stock has shed all of its gains over the past five years and is down by 23% year-to-date.

Nio may end up cutting more jobs after already getting rid of 10% of its staff. The demand for electric vehicles has fallen below expectations across the industry and can hurt Nio’s finances.

The company offered uninspiring guidance that calls for 0.1% to 4% year-over-year revenue growth. That’s not the type of growth investors expect from growth stocks. Especially given that Nio’s decelerating revenue growth rate comes at a time when the company is burning through billions of dollars each year. 

Nio has more solid footing than Nikola Motors and many pure EV plays. However, investors may want to stay on the sidelines instead of buying shares.

On the date of publication, Marc Guberti 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.

On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.

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