These 3 popular actions are more of a trap than a treat
Forget about ghouls and goblins – if you want to scare an investor, just show them a five week chart of the benchmark S&P 500 between February 19 and March 23. The S&P 500’s 34% loss in about a month in the first quarter marks the fastest bear market drop in history.
Of course, the 2019 coronavirus disease (COVID-19) pandemic and record stock market volatility aren’t the only scares investors may face in the near term. A trio of exceptionally popular stocks currently looks more like a gimmick than a treat. Think twice before buying from these companies.
Cue the chorus of boos, but investors should be very skeptical of the electric vehicle (EV) maker Tesla Motors (NASDAQ: TSLA).
As an investor, I can be very skeptical of a business and still give credit where it’s due. Tesla CEO Elon Musk has achieved what has not been done in over five decades – to build a new auto company from scratch and achieve mass production. Electric vehicles are unquestionably the future of the automotive industry, and Tesla has been at the forefront of technological innovation in electric vehicles and batteries.
But Tesla is also fooling its shareholders into believing it is firing on all cylinders (pardon the fuel engine pun). Although Tesla reported five consecutive quarterly profits, four were only the result of the sale of regulatory credits. In each of the past four quarters, Tesla has sold $ 133 million, $ 354 million, $ 428 million, and $ 397 million in regulatory credits, while generating generally accepted accounting principles (GAAP) net income of $ 105 million, $ 16 million, $ 104 million and $ 331 million. Without these regulatory credits, Tesla is not profitable under GAAP. There is only a limited number of credits Tesla can sell, which leads me to believe that the next few quarters will not have that delicate (but perfectly legal) boost to GAAP profits.
Tesla investors must also dealing with the ups and downs of having Elon Musk as CEO. While he’s definitely a visionary, he’s also a bit of a cowardly gun. He’s been in trouble with the Securities and Exchange Commission more than once. It also has a long history of over-promising new technology, at least when it comes to new product or software launches.
Tesla has been a treat for long-term shareholders, but appears to be more of a trap at its current valuation.
Another company that looks great but becomes questionable on examination is biotech action. Inovio Pharmaceuticals (NASDAQ: INO).
Inovio has been on fire in 2020 as it is one of a dozen publicly traded drug developers testing a Covid-19 vaccine. The COVID-19 pandemic offers multi-billion dollar sales potential for biotech and pharmaceutical companies. In a phase 1 trial, Inovio’s investigational vaccine INO-4800 elicited an immune response in 94% of patients.
Inovio is more of a trap than a treat at this point thanks to two factors.
First, the Food and Drug Administration conducted the company’s Phase 2/3 clinical trial on partial maintenance. There are no safety concerns, but the regulatory agency has questions regarding INO-4800 and its accompanying Cellectra delivery device, which Inovio will need to answer before the study can proceed. The longer Inovio experimental therapy remains on hold, the more it lags behind competing therapies.
Second, Inovio hasn’t really shown much to investors in the past four decades. Although he has been able to raise funds through common stock offerings and grants from the US government, he doesn’t have a single approved therapy to show for it. Even if Inovio somehow surpasses its poor drug development track record and brings a vaccine to market, it is unlikely to be the only drug maker to provide a COVID-19 vaccine.
At this point, Inovio’s growth story seems to be quite exaggerated.
Young investors love it marijuana stocks, and licensed Canadian producer Aurora Cannabis (NASDAQ: ACB) often at the top of the list. It’s easy to love the pot industry with sales estimates for the surge in legalized weed across North America. Nonetheless, it is important to realize that not all businesses will be winners in this space.
By mid-2019, Aurora seemed to have it all. The company had a peak annual production potential of over 650,000 kilograms with access to two dozen countries outside of its home market, Canada. But since mid-2019, it has closed five of its smaller grow operations, halted construction on two of its larger projects to save money, and sold a separate 1 million-square-foot greenhouse that it doesn’t has never been renovated for the production of pots. It also ships very little in terms of international sales.
What has Aurora brought to shareholders? The wrong kind of buzz. In fiscal 2020, the company wrote down more than C $ 2.8 billion, much of which was related to its grossly overvalued acquisitions. Despite these huge losses, a recent SEDAR filing showed that the company’s executives qualified for a healthy salary increase and bonus increase during the year ended in June.
In addition, Aurora Cannabis does not stop spending its cash at checkout and dilute its shareholders. The company recently finalized an offer in the market for $ 250 million (i.e. in the United States) and this week announced another ATM offer of $ 500 million. This comes after the number of Aurora shares outstanding fell from around 1.3 million in June 2014 to 160.7 million in October 2020.
Although marijuana is expected to be a high growth industry this decade, Aurora Cannabis is not this the stock to own in this space.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.