The GameStop (GME) frenzy took Wall Street by storm earlier this year in one of the biggest, unprecedented short squeezes in history. The young or novice investors on Reddit’s r/WallStreetBets (WSB) chatroom reported substantial gains from this stock because its price soared 3,116.6% over the past year. However, the company lacked fundamental strength–its revenues and earnings were declining over the prior three years, along with a bleak outlook. Investors were primarily targeting highly speculative companies, such as GME, to corner hedge funds to increase their short-term returns.
The investment environment has changed significantly over the past couple of months, however. Investors are now betting on value stocks with solid fundamentals and significant growth potential because the economy is recovering at a faster-than-expected pace. Owing to this change in sentiment, the Reddit community has failed to trigger another GameStop-like short squeeze. Investors are now betting on the U.S.’ economic recovery and a rebound in global markets rather than speculating for short-term gains.
While several Reddit communities, such as WSB and ‘pennystocks’, are trying to precipitate another short squeeze, the majority of stocks targeted by these groups are highly speculative, with bleak growth projections and poor financials. Thus, we believe Reddit stocks Sundial Growers Inc. (SNDL), Ocugen, Inc. (OCGN), Castor Maritime Inc. (CTRM), and Naked Brand Group Limited (NAKD) are best avoided now.
Sundial Growers Inc. (SNDL)
The Canadian cannabis producer is one of the Reddit investment community’s favorite penny stocks. Shares of SNDL have been soaring over the past couple of months because the Reddit community began aggressively advertising the stock to trigger a short squeeze. SNDL’s stock has gained 375.5% over the past six months, and 76.3% year-to-date.
Thanks to the widespread remote lifestyle adopted over the past year, the sale of adult-use cannabis rose significantly over the past year. Gross revenues increased 10% year-over-year to $73.32 million in fiscal 2020. However, SNDL’s annual net loss from continuing operations increased 45% from its year-ago value to $206.32 million.
Its quarterly gross revenues rose 4% from the same period last year to $16.87 million in the fourth quarter, ended December 31, 2020. However, the company’s net revenues declined 6% from the prior year quarter to $13.85 million over this period. Its net loss came in at $64.14 million, representing a 128% rise year-over-year. This can be attributed to a substantial rise in its finance costs.
Despite the booming Canadian cannabis markets, SNDL failed to generate profits from its operations over the past year. Also, with marijuana legal in the country, SNDL’s weak financials can be attributed to internal issues. Because the company operates primarily in the Canadian markets, it is not expected to benefit from prospective marijuana legalization in the U.S. With investors shifting away from the stock given its bleak growth outlook, SNDL has declined 31% in the last month.
Analysts expect SNDL’s EPS to be zero in both its fiscal first and second quarters. Furthermore, the company missed the Street’s EPS estimates in each of the trailing four quarters. The consensus $10.69 million revenue estimate for the most recent quarter, ended March 2021, indicates a 52.3% decline year-over-year. SNDL’s EPS is expected to decline 20.3% from the same period last year to $12.30 million in the current quarter, ending June 2021.
SNDL has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The stock has an F grade for Value, Sentiment, and Stability. Of the 232 stocks in the F-rated Medical – Pharmaceuticals industry, SNDL is ranked #227.
In total, we rate SNDL on eight different levels. Beyond what we’ve stated above, one can view additional POWR Ratings for Growth, Momentum, and Quality here.
Ocugen, Inc. (OCGN)
OCGN is a clinical stage biopharmaceutical company that is focused on developing gene therapies to treat blindness. The company’s partnership with Bharat Biotech, that was announced last December, to develop COVAXIN as a vaccine candidate for COVID-19made the stock a big hit in the Reddit community. Shares of OCGN have gained 2,877.7% over the past six months, and 426.2% year-to-date. In fact, the stock has gained 66.6% over the past five days to close Friday’s trading session at $9.63.
Though initially developed to be supplied in both the United States and India, the jointly developed vaccine is currently being used to vaccinate residents of the Indian subcontinent. While COVAXIN has proven to be 78% effective against the COVID-19 virus, with a 100% efficacy rate in preventing severe cases, it has yet to be distributed in the United States. The company plans to launch its vaccine in the U.S. soon. However, given the rapid pace of vaccinations in the United States, the demand for COVAXIN in later months is expected to be lean. Also, the high price of the vaccine in India might lead to a low demand there too.
A $0.37 consensus EPS estimate for the second quarter, ending June 2021 represents a 294.7% improvement year-over-year. However, the company missed the Street’s EPS estimates in each of the trailing four quarters. Its revenues are expected to rise substantially from the prior year quarter to $78.0 million in the fiscal second quarter.
OCGN’s POWR Ratings are consistent with this bleak outlook. It has an overall D rating, which equates to Sell in our proprietary rating system. The stock has an F grade for Stability, and D for Momentum, Sentiment, and Quality. It is ranked #345 of 491 stocks in the F-rated Biotech industry.
In addition to the grades I’ve highlighted, one can check out OCGN Ratings for Growth and Value here.
Castor Maritime Inc. (CTRM)
CTRM is a cargo and raw material transportation company headquartered in Cyprus. The company attracted Reddit investors as a major transporter of oil, thanks to rising crude oil prices earlier this year. Shares of CTRM have gained 217.4% over the past six months, and 160.4% year-to-date.
CTRM’s net time charter revenues have increased 54.3% year-over-year to $4.39 million in the fourth quarter, ended December 31, 2020. However, its EBITDA declined 28.5% from the same period last year to $276.58 million, while its operating loss came in at $475,406. Its net loss stood at $768,912, up 245.6% from the prior-year quarter. The company lost one cent per share over this period.
Established in 2016, CTRM is a small-cap, penny stock that traded at 48 cents per share as of April 23. Rising crude oil prices and new vessel acquisition news were the primary drivers of the company’s share prices over the past couple of months. However, the recent slump in oil prices–due primarily to the surge in coronavirus infections in India that has dampened global demand–is expected to negatively impact CTRM. As the demand for bulk materials and oil slumps in one of the biggest consumer markets in South Asia, CTRM’s operations are expected to decline significantly in the near term.
CTRM has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The stock has a D grade for Growth, Value, Stability, Sentiment, and Quality. Of the 51 stocks in the C-rated Shipping industry, CTRM is ranked #49.
One can also check out CTRM’s rating for Momentum here.
Naked Brand Group Limited (NAKD)
Based in New Zealand, NAKD is a retail clothing company that designs and manufactures intimate apparel for men and women, and swimwear for women. Reddit investors have been betting on this company to emerge as a leading apparel manufacturer in the e-commerce industry because it plans to shift its focus from its brick-and-mortar stores to develop a strong online presence. NAKD stock has gained 660% over the past six months, and 196.9% year-to-date.
Though NAKD has an online presence in the United States and Europe, most of its business is concentrated in New Zealand and Australia. In terms of business structure, NAKD has zero debt; the company finances its operations through direct placement equity offerings. Given the near-zero interest rates around the world, NAKD’s cost of capital is significantly higher than the industry average because it failed to capitalize on the cheap debt money available in the low-interest-rate environment. .
NAKD’s stock was on the verge of being delisted from Nasdaq because stock failed to meet the minimum bid–price rule of $1 over the previous 30 consecutive business days. NAKD announced on February 23 that it had regained compliance by maintaining a minimum closing bid price of $1 or more for the 10 consecutive trading days.
NAKD’s trailing-12-month revenues stood at $54.72 million, down 15.1% year-over-year. Also, the company’s net loss stood at $29.19 million over this period, while its loss per share slumped 95.5% from the same period last year to $3.77. Its trailing-12-month ROE came in at negative 3,812.12%.
It’s no surprise that NAKD has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. It has an F grade for Quality, and D for Sentiment and Stability. Of the 71 stocks in the C-rated Consumer Goods industry, it is ranked #63.
We have also rated NAKD for Momentum, Growth, and Value. Get all NAKD’s ratings here.
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SNDL shares were trading at $0.88 per share on Monday afternoon, up $0.05 (+5.73%). Year-to-date, SNDL has gained 85.85%, versus a 12.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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