Investments are generally tied to broad macroeconomic themes such as changing demand, inflation, interest rates, or other big-picture items.
However, in some cases, an investment’s fate largely depends on regulatory or political events. Even if the economic picture is favorable, a negative dealing with the government can entirely invalidate the bullish thesis. For these three stocks to sell today, regulatory risk is at a high level this year.
Hawaiian Holdings (HA)
Hawaiian Holdings (NASDAQ:HA) is one of America’s top ten largest airlines. It operates primarily with routes connecting the island state of Hawaii to various destinations along the U.S. West Coast along with Japan, Australia, and other international destinations.
HA stock skyrocketed in December when Alaska Air Group (NYSE:ALK) announced that it would be acquiring Hawaiian for $18/share. This offer represents a massive 270% premium to where HA stock was trading prior to the takeover offer.
On paper, that sounds great. In practice, however, there are considerable doubts that regulators will approve Alaska’s takeover. The combined airline would have outsized market share on routes heading west from the continental 48 states.
It seems likely that the Department of Justice will sue to block the takeover offer. And that’s not an empty threat. After all, the DoJ successfully blocked JetBlue’s (NASDAQ:JBLU) recent acquisition offer for Spirit Airlines (NYSE:SAVE), which caused SAVE stock to implode.
Hawaiian shares were trading for around $5 each prior to Alaska’s M&A offer. It is at nearly $15 now. If the antitrust regulators block the Hawaiian takeover, HA stock can have a 50%+ downside and fall back to the mid-single digits. That outcome seems very likely.
Coinbase Global (COIN)
There was a great deal of excitement among digital asset investors ahead of the launch of a number of exchange-traded funds (ETFs) devoted to cryptocurrencies.
However, this catalyst largely came and went without too much follow-through; crypto prices have slid as the initial ETF buzz has worn off.
This leaves Coinbase Global (NASDAQ:COIN) in a difficult position. It will likely lose a fair chunk of its business as people choose to buy crypto via ETFs rather than through Coinbase’s brokerage. Falling crypto prices are bad for business overall. And Coinbase itself is losing money and faces significant legal challenges from regulators.
The Securities and Exchange Commission (SEC) is going after Coinbase for allegedly operating as an unregistered securities broker. Analysts expect this legal dispute to drag on for an extended period, adding regulatory uncertainty to an already challenging business outlook for this crypto brokerage.
AdvisorShares Pure US Cannabis ETF (MSOS)
This last call is not specific to an individual company but rather a sector theme as a whole: Cannabis. Cannabis stocks have soared over the past quarter around excitement around a potential loosening of federal restrictions on marijuana.
The AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS), which owns a variety of American marijuana distributors, is up by 70% over the past six months. This has come as traders are positioning for favorable regulatory changes.
The Department of Health and Human Services has recommended that cannabis be rescheduled to a less serious class of drug, which would allow more capital to enter the industry. That would be a positive, to be certain. However, we’ve seen plenty of other times where favorable cannabis regulation seemed imminent, and then it fell through for whatever reason.
Given that many of the cannabis companies are still running large operating losses and have challenged balance sheets, this is a highly speculative sector. Whenever marijuana stocks run up sharply, as the MSOS ETF has recently, it is usually a good chance to take profits before the inevitable retracement.
On the date of publication, Ian Bezek 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.
