Penny stocks are considered high-risk/high-return investments. Generally priced at less than $5, many of these stocks gain significantly to deliver three- and  four-digit returns. However, these stocks often carry big risks because the issuing companies are typically not experienced in their respective operating fields. Furthermore, penny stocks priced below $1 often carry the risk of being delisted from major stock exchanges due to  stringent eligibility conditions related to share price with respect to a company maintaining its listing.  But penny stocks generally perform well during periods of economic recovery because the companies are afforded an opportunity to expand their production and sales and, by extension, their market reach.

However, various macroeconomic measures, such as rising inflation, lower-than-expected job growth and sky-high commodity prices, are currently pointing to a market pullback.

Against this backdrop, Reddit community wallstreetbets has been showing interest in penny stocks Sundial Growers Inc. (SNDL), Naked Brand Group Limited (NAKD), and FSD Pharma Inc. (HUGE). But, given their poor financials and bleak growth prospects, we think these stocks are best avoided now.

Sundial Growers Inc. (SNDL)

SNDL is a Canadian cannabis producer for the medicinal and adult-use markets. With a $0.79 share price, it is one of the most talked-about stocks in the Reddit wallstreetbets forum. Shares of SNDL have gained 204.9% over the past six months, and 66.8% year-to-date.

SNDL’s zero debt obligations and expanding market presence in the United States are impressive. However, the company’s financials and growth estimates indicate a bleak outlook. It has yet to turn a profit. Also,  the company received a warning from Nasdaq in February regarding its failure to comply with listing rules; its share price fell below the stipulated requirement of $1 for 10 consecutive days. While SNDL has since managed to regain compliance, the share price is currently below $1, which might trigger another delisting threat soon.

SNDL reported positive adjusted EBITDA of CAD3.33 million ($2.76 million) for the first time in its history for the quarter ended March 31, indicating a 129% improvement year-over-year. However, SNDL’s net loss from continuing operations declined 254% year-over-year to CAD134.45 million ($111.60 million) over this period. Its gross cannabis revenue came in at CAD11.70 million ($9.71 million), down 30% sequentially.

Analysts expect SNDL’s annual EPS to remain negative in 2021 and break even in 2022. The company has a poor earnings surprise history; it missed the Street’s EPS estimates in three  of the trailing four quarters. The $48.81 million consensus revenue estimate for its fiscal year 2021 indicates a 3.3% decline year-over-year.

SNDL has an overall F rating of F, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a grade of F for Value, Quality, Sentiment and Stability. Of the 227 stocks in the F-rated Medical – Pharmaceuticals industry, SNDL is ranked #225.

Beyond what we’ve stated above, one  can check out additional SNDL Ratings for Growth and Momentum here.

Click here to checkout our Healthcare Sector Report for 2021

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. Several members of the wallstreetbets community have purchased shares of NAKD with the aim of instigating another short squeeze in the market. As a result, NAKD has gained 363.3% over the past six months, and 212.5% year-to-date. The stock gained 4.9% intraday to close yesterday’s trading session at $0.60.

NAKD has announced  plans to transform its business operations into a pure play e-commerce platform and is divesting its retail brick-and-mortar stores for this purpose. However, given the immense competition in the e-commerce space–several blue-chip companies dominate the global markets–NAKD’s success is uncertain.

In terms of business structure, NAKD has zero debt. The company finances its operations through direct placement equity offerings. Given near-zero interest rates currently, NAKD’s cost of capital is significantly higher than the industry average because  it has failed to capitalize on the cheap credit available. NAKD’s net sales declined 19.5% year-over-year to NZ$90.10 million ($58.50 million) for the fiscal year ended December 31, 2020. Its net loss came in at NZ$52.20 million ($33.90 million), up 6.1% from the prior year. Its loss per share declined 82.7% from the same period last year to NZ$34.74 ($22.58).

NAKD’s POWR Ratings reflect this bleak outlook. It has an overall D rating, which equates to Sell in our proprietary rating system. The stock has a D grade for Quality, Sentiment and Stability. NAKD is ranked #64 of 72 stocks in the D-rated Consumer Goods industry.

In addition to the grades we’ve highlighted, checkout NAKD Ratings for Growth, Momentum, and Value here.

FSD Pharma Inc. (HUGE)

Canada-based HUGE produces and distributes cannabis for medical purposes through its wholly owned subsidiary FV Pharma. It also has an extensive drug pipeline with lead candidate FSD 201 for coronavirus treatment currently under clinical trials. Reddit community’s wallstreetbets and RobinHood PennyStocks expect FSD to gain significantly in the coming months as the United States gradually decriminalizes marijuana. Shares of HUGE have gained 12.2% year-to-date, and 27.7% over the past six months to close yesterday’s trading session at $1.75.

However, HUGE is currently grappling with internal management conflicts. It  launched a criminal investigation on former CFO Donal Carroll for allegedly interfering with the company’s business during a proxy contest. The alleged proxy solicitation was an attempt to gain control of the company’s board of directors. Owing to the legal proceedings, the company appealed for a  postponement of its annual shareholder’s meeting. For three months ended September 30, 2020,  HUGE’s net loss came in at C$18.03 million ($14.97 million), up 6% year-over-year. This can be attributed to a 57% rise in operating expenses to C$17.49 million ($14.52 million).

Analysts expect HUGE to report a $1.06 loss per share for the fourth quarter ended December 31. Also,  the  Street expects the company’s EPS to remain negative until at least 2022.

It’s no surprise that HUGE has an overall D rating, which equates to Sell in POWR Ratings system. The stock also has a D grade for Value, Stability and Quality. It is ranked #216 in the Medical – Pharmaceuticals industry.

We have also graded HUGE for Growth, Momentum and Sentiment. Get all HUGE Ratings here.

Click here to check out our new  Cannabis Industry Report for 2021

SNDL shares were trading at $0.73 per share on Wednesday afternoon, down $0.06 (-7.84%). Year-to-date, SNDL has gained 54.17%, versus a 10.15% 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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