There’s an old Wall Street adage that says “the market can stay irrational longer than you can stay solvent.” We saw that play out time and again with certain beaten-down stocks. Just when you think they can’t possibly go any lower, they find new depths to plumb.
Retail investors often mistake these relentlessly-declining stocks as bargains, thinking they’re getting a once-in-a-lifetime discount. In reality, these are nothing more than value traps waiting to snare the unsuspecting. The single biggest culprit? Dilution.
Many companies are essentially paralyzed – generating little to no revenue while burning through cash like a drunken sailor. With sketchy fundamentals like that, you’d think management would be doing everything to right the ship. Instead, many of these companies continue diluting shareholders into oblivion, just to keep the lights on for a few more quarters.
It’s a vicious cycle that has plagued many a struggling business. They dilute, reverse split, rinse, and repeat until your stake is all but obliterated. Indeed, shorting these stocks can generate perpetual gains, in theory, if they go to zero. However, one ill-timed short squeeze can leave your positions under water, and fast.
That said, if you spread your short bets across multiple companies exhibiting these dreadful traits, the odds start tilting in your favor. Here are three stocks worth shorting for endless gains.
Mullen Automotive (MULN)
Mullen Automotive (NASDAQ:MULN) has been one of the most egregiously-dilutive stocks in an industry already notorious for cash-burning startups living out their last days through endless capital raises. Lower interest rates could provide a much-needed jolt to spur EV demand. But let’s be real here – rate cuts alone won’t be enough to resuscitate a zombie company.
Mullen’s case is particularly dire. As a pre-revenue company, the sheer amount of cash the company is hemorrhaging is staggering. Mullen posted losses of $972 million in 2023 with a measly 141 Class 3 vehicle deliveries to show for it. To call their operations “shady” would be an understatement akin to describing the Sahara as “a bit dry.”
Even if we suspend disbelief and imagine a scenario where Mullen somehow transforms into the next Tesla (NASDAQ:TSLA), the stock’s dilution has been so extreme that current shareholders would be left with crumbs.
Beneficient (BENF)
Next up, we have Beneficient (NASDAQ:BENF) – a company that has clearly not been so “beneficient” to its long-suffering shareholders. Their offerings include unlocking liquidity for alternative assets, fiduciary financing, custody services, and so on.
Here’s the kicker though – this enterprise managed to deliver negative $105 million in revenue for the full year 2023. Beneficient also racked up $131 million in losses to boot.
With a minuscule $15.5 million market cap, Beneficient is undoubtedly on its last legs. BENF stock is already well below Nasdaq’s listing requirements, so brace yourselves for more reverse splits and dilutive capital raises on the horizon.
I’m sure there are far more solvent and competent firms out there that could “unlock liquidity” for your alternative assets. Shorting this stock is the only position I’d recommend taking in this case.
CareMax (CMAX)
CareMax (NASDAQ:CMAX) is a healthcare company focused on providing value-based care for seniors on Medicare Advantage plans. If you’ve been invested in any healthcare stocks recently, you’ve likely seen some losses thanks to disappointing Medicare reimbursement rates. But CareMax takes underperformance to a whole new level.
This stock has been bleeding cash relentlessly since early 2021, with no discernible way out of its death spiral. In 2023 alone, CareMax racked up an eye-watering $683 million in losses. And with a puny $17 million market cap and just $65 million in cash reserves, the writing is on the wall for this company.
Even the most optimistic of analyst projections don’t forecast profitability for CareMax until 2031 at the earliest. And let’s be honest here, with that kind of cash burn rate, CareMax will be six feet under long before then unless a miracle occurs.
I get it, value-based care for seniors is a noble cause. But when a company is posting these kinds of losses with no clear path to sustainable profits, it’s time to cut your losses and run for the hills.
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On the date of publication, Omor Ibne Ehsan 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.
