The explosive stock market rally seen on Nov. 10 may have invited some investors to start thinking this downturn is coming to a close. However, before you make the move from “risk-off” to “risk-on,” there are certainly concerns to consider. That goes double for those planning to dive back into speculative investments. There are plenty of cryptos and penny stocks to avoid in this current market.
I think it’s very possible that this impressive spike in risk assets will soon reverse. This rally was driven by Consumer Price Index (or CPI) data showing a cooling of inflation. Thus, many expect that the Federal Reserve may be on the verge of easing on future interest rate hikes, or perhaps even starting to pivot (or cutting rates much sooner than expected).
However, while inflation may be cooling, the overall inflation rate remains at multi-decade highs. There’s a good chance the Fed carries on with rate hikes to tame this inflation further. Accordingly, as interest rates continue to rise, stocks could give back this week’s gains, and then some. In my view, the economic downturn has plenty of room to continue to worsen.
In turn, I expect this reversion to hit these seven penny stocks to avoid harder than most equities. Each of the stocks on this list is overvalued, with poor fundamentals.
|Bed Bath & Beyond
Bed Bath & Beyond (BBBY)
Reddit favorites like AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) have at least held onto some of their respective “meme stock” gains. However, the same can’t be said about Bed Bath & Beyond (NASDAQ:BBBY), once a popular short-squeeze play among the r/WallStreetBets trading community. This company is the first on my list of penny stocks to avoid for a reason.
In fact, not only has BBBY stock given back all of its gains from its recent meme-related rally, but shares in the home goods retailer now trade at a fraction of their pre-meme surge prices. Investors can chalk this up to a severe deterioration of the company’s fundamentals. High inflation has both dampened consumer demand and squeezed margins, resulting in substantially lower sales, and ballooning losses.
This has already sank BBBY to penny stock levels, but don’t assume the worst is already priced-in. Even if the company avoids Chapter 11, the shareholder dilution that could result from debt exchanges and secondary offerings could keep pushing shares to lower prices.
Bakkt Holdings (BKKT)
Already in the stock market graveyard, it may seem as if Bakkt Holdings (NYSE:BKKT) has little room to fall from here. The fintech firm, whose platform enables banks and merchants to offer crypto services and crypto loyalty programs, has fallen more than 92.5% in the past year. This move comes as the crypto boom has turned into a resounding crypto bust.
Unfortunately, more price declines may be in store for BKKT stock. Sure, the company continues to scale up its business, most recently through its plans to buy rival Apex Crypto. Some recent studies suggest interest/usage of crypto keeps rising, even through this so-called “crypto winter,”
However, these catalysts may fail to translate into a big payoff for investors buying BKKT stock today. Bakkt is still burning heavily through its cash, much like many of the other penny stocks to avoid. This provides a similar downside catalyst for the company, with potential future dilution limiting the stock’s upside potential.
Clover Health (CLOV)
Already down massively from its meme stock highs at the start of 2022, poor results and changing stock market conditions have put more pressure on Clover Health (NASDAQ:CLOV) shares so far this year.
Investors can now buy CLOV stock at around a 94% discount to its high-water mark. That said, I don’t think it’s safe to assume that means this former high-flier has big upside potential. Clover has made significant improvements with its Medical Care Ratio, or MCR (percentage of premiums paid out as claims). However, high fixed overhead costs are keeping this stock firmly in the red.
With revenue growth expected to decelerate from triple-digit levels to slightly negative next year, Clover’s path to profitability remains murky at best. While the company may have enough cash to keep the lights on, barring a sharp swing from negative to positive earnings, CLOV stock could certainly remain at depressed prices for some time.
In 2021, FuboTV (NYSE:FUBO) appeared very appealing to many growth investors. Tapping into both the cord-cutting and legalized sports betting trends, the company appeared to be set to dominate the competition in both streaming and online gambling. This was the result of FuboTV’s business model, which revolved around building a platform that could enable fans to both watch and wager on sporting events.
However, since then, this bull case for FUBO stock has been shattered. Revenue and subscriber growth has decelerated sharply in recent quarters. If this trend continues, it will be difficult for the company to narrow its losses. Worse yet, the sports betting angle, which made this a “hot stock” last year, is no longer a factor as FuboTV shut down its sportsbook operations last month.
Without the growth from FuboTV’s sportsbook segment, this company now has little to differentiate it from competing streaming platforms. Thus, continued poor performance and a high cash burn rate could be the factors that send FUBO further into penny stock territory.
In an effort to get out of a multi-decade slump, scanning technology company Microvision (NASDAQ:MVIS) threw its hat into the lidar technology ring in late-2020. This move into a fast-growing industry (lidar technology is widely used to enable self-driving capabilities in vehicles) resulted in MVIS stock transitioning from overlooked micro-cap tech stock to popular meme stock.
That said, the fact that Microvision has thus far failed to secure a partnership with a major automaker means MVIS stock has made a full round trip back to prices last seen around the time the company decided to enter the lidar space. So, no longer trading at a “lidar premium,” what makes this company one of the penny stocks to avoid?
Well, Microvision Currently generates zero revenue, and with only around $83 million in cash and short-term securities on hand, today’s valuation (which gives Microvision a market cap of around $580 million) is not sustainable.
Scores of electric vehicle stocks have fallen into the stock market junkyard. Nikola (NASDAQ:NKLA) is one such EV stock. That said, a few weeks ago, enthusiasm for this early-stage maker of battery and hydrogen-powered electric trucks appeared set to make a comeback.
In the lead up to the company’s most recent quarterly earnings, shares briefly spiked. However, while beating Wall Street estimates, downbeat guidance from CFO Kim Brady on the post-earnings conference call quickly brought an end to the NKLA stock rally. Shares have since fallen back, hitting a new 52-week low just before the Nov. 10 broad market rally.
Worse yet, I think shares could keep sliding. Beyond near-term challenges, it remains questionable whether this EV “also-ran” can finally make the leap to the big leagues. As InvestorPlace’s Muslim Farooque recently argued, Nikola severely lacks the cash necessary to achieve its long-term objectives. That’s the sort of medium- to longer-term outlook that inspires few in this market right now.
Skillz’s (NYSE:SKLZ) cash-based competition mobile gaming platform is certainly intriguing, with its mobile games based around the skill of its users. However, so far, investing in SKLZ stock has been a gamble that’s failed to pay off.
This is another hot stock that’s been crushed during this year’s bear market. Currently, shares of SKLZ stock are down around 90% year-to-date.
It’s not merely the fact that growth stocks have fallen out of favor due to rising interest rates and slowing economic growth that has pushed SKLZ stock to rock-bottom prices. As Louis Navellier argued earlier this year, the company has been forced to abandon its original growth strategy. Heavy spending on the company’s customer acquisition strategy failed to result in a lasting customer base.
Skillz has since slashing marketing spend. However, this strategy change hasn’t produced materially better results. Revenue has dropped, and operating margins remain negative. Expected to stay unprofitable until at least 2025, until SKLZ improves its profit-making “skills,” stay away.
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.
Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Thomas Niel 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.