For the past 15 months, Wall Street and investors have enjoyed a historic bounce-back rally. The benchmark S&P 500 has gained more than 90% since hitting its bear-market bottom on March 23, 2020.
While a number of high-quality and innovative businesses have led this rally, it’s also allowed quite a few terrible companies to thrive. It’s my suggestion that the following five ultra-popular stocks be avoided like the plague in July.
First up is cryptocurrency exchange and ecosystem Coinbase Global (NASDAQ:COIN). Coinbase is popular given how quickly its revenue and profits surged in the first quarter as investors piled into the likes of Bitcoin and Ethereum. The problem is there are a trio of catalysts working against the Coinbase brokerage model.
To start with, there’s nothing that prevents competing exchanges from undercutting Coinbase Global’s fees. It might have the verified user advantage at the moment, but don’t underestimate the willingness of crypto investors to jump ship to save on transaction fees. We witnessed it among traditional brokerages, and the industry eventually wound up going commission-free.
Second, crypto has a history of boom-and-bust cycles. Bitcoin has had three separate instances over the last decade where it’s shed at least 80% of its value. This is an entirely momentum-based investment, and when upside momentum dries up, so does Coinbase’s trading revenue. Following a 2017 peak, Coinbase saw its revenue nearly halve in subsequent years.
And third, the past four weeks, through June 28, saw outflows from crypto of $257.3 million, according to CoinShares Digital Asset Fund Flows Weekly. This is more evidence that interest in crypto is already dwindling with these assets well off their highs. Suffice it to say, Coinbase is not a stock you’re going to want to own moving forward.
Cassava rightly made waves in February when it announced positive clinical data from an interim analysis of simufilam as a treatment for Alzheimer’s disease. The open-label trial showed improvement in cognition and behavior at the six-month mark, and more recently allowed Cassava to outline its plans for a phase 3 trial involving its lead drug candidate.
I’d love for simufilam to be successful, but history has shown that Alzheimer’s is one of the toughest-to-treat diseases. With the exception of Biogen‘s Aduhelm, which was approved by the Food and Drug Administration (FDA) but has been criticized heavily for its lack of clear benefit, every Alzheimer’s drug has failed in late-stage studies for more than a decade. All investors have to go on is early stage, open-label data from a trial that aimed to enroll 100 patients. It’s not been uncommon to see positive early or-mid-stage results get pulverized come a large phase 3 Alzheimer’s trial.
Although Cassava raised a good amount of cash to continue its research, history suggests that simufilam’s chance of success is very slim. That makes Cassava Sciences easily avoidable.
If you’ve been following the retail trade movement (i.e. Reddit stocks), whereby retail investors are seeking out heavily short-sold companies and attempting to effect a short squeeze, you probably know video game and accessories retailer GameStop (NYSE:GME).
On one hand, GameStop has been able to capitalize on its recent fame by selling stock to raise capital for its ongoing transformation to a digital gaming company. It’s a much-needed move after e-commerce sales jumped 191% in fiscal 2020 and more than quadrupled during the holiday season, from the prior-year period.
However, these capital raises don’t overlook the fact that the previous management team failed the company. For two decades, a brick-and-mortar gaming model worked well. However, sticking to this brick-and-mortar model when gaming was going digital left the company in a precarious position. Today, GameStop continues to lose money, even with rapid e-commerce growth, and saw its same-store sales decline by almost 10% last year. Digital sales may be growing, but total revenue is going nowhere as GameStop shutters its physical locations to lower costs.
GameStop is in no way a bankruptcy candidate, and I can actually see a path to profitability years down the road. But with that being said, the gains it’s seen make no sense given the long transformation and operating losses that lie ahead.
Biotech stocks can offer ample opportunity, or in Inovio Pharmaceuticals‘ (NASDAQ:INO) case, suck the lifeblood out of long-term investors.
Inovio would appear to be an intriguing company based solely on paper. It has a pipeline that currently includes over a dozen clinical candidates…