In a bear market, investors tend to be over-cautious. Even fundamentally strong undervalued stocks are ignored. However, when market sentiments change, purely speculative stocks tend to get the spotlight. Even if the stock trades at crazy valuations.
The S&P 500 index has been trending higher year-to-date. With the rate hikes largely done and the U.S. possibly avoiding a recession, market sentiment is likely to remain positive. I expect significant price action in growth and penny stocks in the coming quarters.
However, investors need to be cautiously optimistic. I would recommend that investors stay away from purely speculative stocks. This column discusses the meme stocks to avoid even if the broad market sentiment turns significantly positive.
Not all stocks trend higher in a bull market. These are the meme stocks to avoid due to weak fundamentals.
Electrameccanica Vehicles (SOLO)
Electrameccanica Vehicles (NASDAQ:SOLO) is among the top meme stocks to sell. SOLO stock has trended higher in the recent past with the company announcing the deal to merge with Tevva. I believe that this excitement is short-lived and the stock will trend lower.
As an overview, Electrameccanica commenced business as a seller of single-seat electric vehicles. However, the business failed to gain traction and the company decided to merge with Tevva. This changes the business focus towards commercial EVs.
However, there are two points to note. First, the commercial EV segment is highly competitive and an entry does not guarantee success. Further, the merged entity is targeting revenue of $1.3 to $1.5 billion by 2028. It’s likely that cash burn will continue through this period. This would imply equity dilution in the next few years. I don’t see any strong fundamental reason for SOLO stock to trend higher.
Mullen Automotive (MULN)
It’s worth noting that Mullen Automotive (NASDAQ:MULN) is down by 99.96% since November 2021. This stock is possibly the best example of a speculative wealth destroyer.
MULN stock recently surged by 68% in one day due to a stock buyback program. I see any rally as a good opportunity to sell so you can invest in fundamentally strong stocks.
Recently, the company’s CEO opined that he does “not believe the trading price of our stock even closely resembles the Company’s actual value.” The CEO highlighted that operational progress has been steady and commercial production of its vehicle has commenced.
However, if we understand the language of the markets, there is little confidence in the company’s management team. Cash burn will continue, and even as revenue increases, the company needs to dilute equity. At current levels, massive dilution would be needed to raise funds. It’s also strange that a buyback is initiated at a time when the company needs funding for growth projects.
Fisker (NYSE:FSR) is another meme stock to sell at current levels. It’s worth noting that FSR stock has declined by 30% in the last 12 months. However, the short interest in the stock is significantly high at 45%.
There can be a case for a massive short squeeze rally. I would look at some of the better names from a fundamental perspective to benefit from a short squeeze rally.
I believe that the EV space is overcrowded and some players are unlikely to survive in the next few years. Fisker might find it difficult to navigate an intensely competitive market.
For 2023, Fisker has guided for production volumes of 20,000 to 30,000 vehicles. The company further expects to have seven models commercialized through 2027. The target is to achieve annual vehicle production of one million by 2027.
I am reminded of Lucid Group (NASDAQ:LCID), which came with some optimistic projections during the SPAC merger listing. However, Lucid has been struggling. The stock price trend is also a clear indication of the point that the market is not buying the growth story.
On the date of publication, Faisal Humayun 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.