Avoid These 4 Stocks Already Up Over 100% YTD

NASDAQ: NVAX | Novavax, Inc. News, Ratings, and Charts

NVAX – The stock market is flying high in a continuation of its 2020 momentum. Over the last few weeks, retail investors have been driving up the share prices of some heavily shorted companies to trigger short squeezes. This, coupled with some company-level developments, is pushing the trading levels of some stocks to lofty valuations. With this, investors should be cautious regarding Novavax (NVAX), Futu Holdings (FUTU), Virgin Galactic Holdings (SPCE) and Skillz (SKLZ) in the near term. We think they are vulnerable to a significant decline based on their weak fundamentals.

The stock market has been subject to worrisome volatility over the past 10 months. After a sharp rebound in the wake of a deep correction last March, the market swooned again in September but then regained its stride after U.S. Presidential elections in November. The market has since extended its post-election momentum into the new year with a solid start to 2021. The stock market is currently hovering around all-time highs as investors remain optimistic about the potential for a coronavirus-vaccine-driven economic recovery this year despite.

Stocks closed at  record levels yesterday on investor optimism about the efficacy of a proposed new round of stimulus in bolstering the economy. The S&P 500 rose 28.76 points, or 0.7%, for the sixth straight day and all three major indexes ended the day at record highs. The new Presidential administration is moving toward the passage of a $1.9 trillion relief bill with the goal of boosting consumer spending. This, coupled with fourth quarter earnings season optimism and recent short squeeze plays,  has renewed investors’ interest in stock market investment opportunities.

However, though momentum stocks usually trade at premium valuations, it is becoming increasingly uncertain whether there is remaining upside in some of the fast-moving names.  Novavax, Inc. (NVAX), Futu Holdings Limited (FUTU), Virgin Galactic Holdings Inc. (SPCE) and Skillz, Inc. (SKLZ) have gained significantly so far this year.  But to us, it appears from their current valuation multiples that a pullback may be in the cards for them. So, we think it is better to avoid these stocks for now.

Novavax, Inc. (NVAX)

NVAX is a late-stage biotechnology company that is focused on the discovery, development, and commercialization of vaccines to prevent serious infectious diseases. The company’s proprietary recombinant technology platform combines the power and speed of genetic engineering to efficiently produce highly immunogenic nanoparticles designed to address urgent global health needs. NVAX is currently conducting late-stage clinical trials for NVX-CoV2373, its vaccine candidate against the coronavirus.

NVAX advanced  more than 2,700% in 2020 as investors went bullish on its coronavirus vaccine candidate. The momentum was   extended this year, and the stock is up nearly 187% year-to-date and closed yesterday’s trading session at $319.93. In fact, NVAX is on the cusp  of tripling in value  in just seven trading days. Its gains are being driven by  promising interim efficacy data from its Phase 3 clinical trials in the U.K.

The vaccine  has proved 89.3% effective overall and 95.6% effective against the original strain of COVID-19 , with no serious adverse events. This puts it on track for approval in the U.K. NVAX has submitted a rolling review to the European Medicines Agency (EMA), the U.S. FDA, U.K. Medicines and Healthcare products Regulatory Agency (MHRA) and Health Canada for Emergency Use Authorization (EUA) as it continues Phase 3 trials in the U.S.

NVAX’s efficacy is in line with its two prime competitors, Pfizer (PFE) and Moderna (MRNA), which  have achieved  95% efficacy. But NVAX’s vaccine is easy to store, distribute and is apparently cheaper than the other two vaccines. Moreover, the company has lined up sufficient production capacity by collaborating with the world’s largest vaccine producer, Serum Institute of India.

However, new COVID-19 strains originating in the U.K. and in South Africa are raising serious concerns because they spread more easily. While both PFE and MRNA have said their vaccines can handle the new variants, NVAX’s ability  to contain the new strain is still questionable. NVAX’s candidate demonstrated 85.6% efficacy against the U.K. strain, while it reported 60% efficacy against the South African strain in a Phase 2b trial in South Africa.

Hence, we believe NVAX’s recent surge was overdone and the stock has advanced too much too soon. It is still uncertain whether t the FDA will approve the vaccine for even an emergency use based on NVAX’s U.K. data. Also, with inoculation drives picking up pace worldwide, , the U.S. will have vaccinated a major portion of its population with at least one shot by the time NVAX completes its Phase 3 clinical trials and received regulatory approval.

NVAX’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D which equates to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

NVAX has a grade of F for Sentiment and D for Growth. Among the 481 stocks in the Biotech industry, it is ranked #332.

In total, we rate NVAX on eight different levels. In addition to the POWR Ratings grades I have just highlighted, you can see the NVAX ratings for Value, Momentum, Stability, Quality, and Industry here.

Futu Holdings Limited (FUTU)

FUTU operates a digitized brokerage and wealth management platform in Hong Kong, China, the United States, and internationally through its proprietary digital platform, Futubull. FUTU began operations in 2011, raising  money from backers such as Tencent (TCEHY), Sequoia Capital, and Matrix Partners. FUTU went public in 2019 and is often referred to as the “Robinhood of China” and  currently has more than  10 million users and $10 billion in total assets under management.

FUTU has been on a remarkable run since the end of December, with its stock price up nearly 180% year-to-date. The stock closed yesterday’s trading session at $128.00 after gaining 10.34% intraday. These gains have come primarily  on the back of FUTU’s solid financials and rapid growth in 2020, which was published in  its third quarter 2020 earnings report last November.

Over the last 12 months, FUTU has generated $295 million in revenues and has earned $108 million in profits. In the third quarter, the company delivered a top-line of $122.1 million, surging 272% year-over-year. Its total number of paying clients increased 136.5% year-over-year to 418,089, while overall total trading volume soared 371%. Its net income margin also saw a massive jump to 42% versus  its year-ago value of 8%, rising 18 times year-over-year to $51.8 million.

FUTU is expanding into markets all over Asia, and its service is especially popular among Gen Z and Millennials. A strong IPO market, coupled with an overall bullish global market, continued to play in FUTU’s favor. Last year, the brokerage established partnerships with several big banks, including Morgan Stanley (MS), Invesco, and BNP Paribas. As a result, Wall Street analysts expect FUTU’s current year revenue and EPS to rise 57% and 70.1%, respectively.

However, former President Trump signed an executive order last month that forced U.S. stock exchanges to delist some Chinese companies and banned U.S. persons from investing in companies linked to the Chinese military. In  addition , the U.S. Congress passed a law that could potentially kick Chinese companies off U.S.-exchanges in 2022 if they do not comply with  U.S. auditing requirements. In response, China has cited national security threats and is unwilling to allow Chinese companies to share their  audit records.

Though the Biden administration has inherited this tense and messy relationship with China from his predecessor investors do not  expect him to act quickly on this restriction. As political tensions between the world’s largest two economies grow, the pipeline of FUTU’s offerings in the U.S. could suffer and the firm may not be able to sustain the  high growth rate seen in 2020, and  major Chinese firms may now think twice before  listing on U.S.  exchanges this year.

FUTU’s POWR Ratings also reflect a bleak outlook. FUTU has a grade of F for both Value and Stability. It is also ranked #9 of 12 stocks in the D-rated Financial Marketplaces industry. We have also given FUTU grades for Growth, Momentum, Sentiment, and Quality. Get all the FUTU ratings here.

Virgin Galactic Holdings Inc. (SPCE)

SPCE is a vertically integrated aerospace company that develops human spaceflight for private individuals and researchers in the United States. The company’s spaceship operations include commercial human space flight and flying commercial research and development payloads into space. SPEC went public in October 2019 through a special purpose acquisition company called Social Capital Hedosophia. SPCE is the world’s first publicly traded commercial human spaceflight company.

SPCE dealt with setbacks in 2020, including the delay of the debut of its commercial service. Consequently, it was heavily shorted, with a  short float of more than 55% in mid-January 2021. But as the Reddit WallStreetBets saga continues, Robinhood traders are now squeezing SPCE shorts and the stock is up 137% year-to-date to close yesterday’s session at $56.25. However, there has been some fundamental value creation as well.

On February 1, SPCE  company provided an update on its flight test program after it’s test flight for VSS Unity’s first human spaceflight failed in December 2020 due to connectivity issues, pushing the company’s timeline back further. The company has announced that it will conduct a new rocket-powered trial of its SpaceShipTwo Unity craft as early as February 13, with plenty of possible alternative dates throughout the remainder of the month. The test flight will also carry research payloads as part of the NASA Flight Opportunities program.

In addition,  a second scheduled test flight could be conducted before the month is out, and as early as March  SPCE’s founder, Sir Richard Branson, would fly to reassure observers of the craft’s safety. At the same time, its competitor, Elon Musk’s SpaceX, which has floated plans to  launch competing space tourism flights with its Starship prototype, recently crash-landed for the second time in a series of high-altitude, unmanned test flights.

However, SPCE is still a pre-revenue company with a market cap of more than $12.5 billion. It has posted a gigantic loss of $139.5 million in the trailing two quarters and investors are eying its next earnings release, which is scheduled on February 25. Despite the current rally, SPCE’s short interest is still 27.45% of its  total share float and the stock has already erased some of its gains as investors  secured profits. SPCE is progressing  toward commercial operations, but its ultimate success remains far from certain.

It is no surprise that SPCE has an overall rating of F, which equates to Strong Sell in our POWR Ratings system. It has a grade of F for Value and Quality. In the F-rated, 28-stock Airlines industry, it is ranked #28. 

Click here to see the additional POWR Ratings for SPCE (Growth, Momentum, Stability, and Sentiment).

Skillz, Inc. (SKLZ)

SKLZ operates a leading mobile games platform for mobile players worldwide. The Skillz platform helps developers build multi-million-dollar franchises by holding casual e-sports tournaments that leverage its patented technology. SKLZ debuted on the NYSE on December 17, 2020 and became the first publicly traded mobile esports platform, following the completion of its combination with special purpose acquisition company Flying Eagle Acquisition Corp. (FEAC).

SKLZ is up a whopping 114% year-to-date. The stock  hit its all-time high of $46.30 last Friday but closed yesterday’s trading session at $42.80. SKLZ has had a solid start to the year and the stock has gained based on  three factors:

First, analysts at Citibank upgraded the stock in early  January citing its uniqueness among other gaming platforms and  its compelling economics. This was followed by ARK Investment Fund buying shares of SKLZ to the extent that the shares now represent  0.72% of its ARK Next Generation Internet ETF (ARKW) portfolio. Last, on February 4, SKLZ teamed up The National Football League (NFL) to crowdsource a future mobile e-sport by hosting a global game developer challenge.

SKLZ’s revenue grew 91% to $162.4 million during the first nine-months of 2020, versus  $85.1 million during the same period in 2019. Its Gross Marketplace Volume (GMV) grew 80% to $1,130, compared to $627 million during the comparable period in 2019. And its average revenue per user (ARPU) improved 5.8% year-over-year to $6.93 during the period. However, its net loss has widened to $78.5 million, compared to a net loss of $14.9 million during the same period last year.

SKLZ is merely a software platform that allows third-party developers to create games to be played. But its impressive user engagement makes it uniquely positioned to capitalize on the rapidly expanding global mobile gaming market. However, management’s goal to more than double its revenues by 2025  is  ambitious because  SKLZ is also the product of a reverse merger, which is not yet profitable. Further, Wall Street analysts expect SKLZ’s current year revenue and EPS to improve 62.6% and 6.7%, respectively.

The stock has moved up at an impressive  pace since its debut mostly  because of its  new partnership with NFL’s enormous brand recognition. The company has generated 79% of its revenue  in the first three quarters of 2020 on the back of just three games (Solitaire Cube, 21 Blitz, and Blackout Bingo).Thus, the company is running on a small portfolio of products, which is one of its  biggest risks. If any of these three games is replaced by some other popular game, both its user engagement and financials could take a massive hit.

Hence, we think SKLZ must tap into new genres, add new monetization models like ad space, and aim to grow organically. Furthermore, the company must expand by entering new geographies because  the international market is four times larger than the North American market but currently  contributes less than 10% to SKLZ’s top line.

SKLZ’s POWR Ratings also reflect a bleak outlook. The stock has an overall rating of D, which equates to Sell in our POWR Ratings system. SKLZ has a grade of D for Value and Sentiment. It is also ranked #20 of 23 stocks in the Entertainment – Toys & Video Games industry.

Beyond what we stated above, we also have given SKLZ grades for Growth, Momentum, Stability, and Quality. Get all the SKLZ ratings here.

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NVAX shares were trading at $323.83 per share on Tuesday morning, up $3.90 (+1.22%). Year-to-date, NVAX has gained 190.40%, versus a 4.41% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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