With the meme stock mania in the rear-view mirror and the equities market in shambles, it’s probably a good time to think about penny stocks to avoid.
Several penny stocks caught fire last year as part of the retail trading frenzy. Novice investors on the WallStreet Bets forum on Reddit were able to rally together an online crowd that took several stocks to new heights. The majority of these stocks have underlying businesses that have struggled for years and essentially caught lightning in a bottle.
With the current market downturn, investors are focusing on stocks that offer long-term value. Don’t get me wrong, there are multiple penny stocks offer healthy upside potential. However, there are plenty that you should probably avoid. Here are seven that fit the bill.
Houston American Energy
Camber Energy (CEI)
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Camber Energy (NYSEAMERICAN:CEI) is an oil and gas player who took during the latter half of the meme-stock mania last year. Its price went up to nearly $5 in September, from just 40 cents.
However, after a scathing short report from Kerrisdale Capital, it soon shed more than 50% of its value. The report criticized Camber’s business and argued that its only asset was a 73% stake in Viking Energy, a company with going concern issues and a negative book value.
Besides a few housekeeping measures and accounting adjustments, Camber hasn’t generated too much buzz of late. Viking is looking to boost its ESG portfolio by investing in its carbon capture technology. It remains to be seen how that pans out, but Camber’s liabilities base continues to outweigh its assets aggressively with every passing year.
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Tilray (NASDAQ:TLRY) is one of the top Canadian cannabis operators. TLRY stock has been a source of grief for its investors ever since it went public.
Over the last three years, the stock has shed more than 85% of its value. A lot of it is due to its lackluster fundamentals, which disappointed investors.
In its recent fourth-quarter results, its net income went from $33.6 million in 2021 to a net loss of $458 million. Moreover, the cost of sales increased 34% from the prior-year period to $160.1 million.
Tilray is facing some major currency headwinds, but many of its troubles are in the market in which it operates. The Canadian cannabis market is fiercely competitive and marked by widespread overcapacity. Hence domestic sales have been contracting sharply for Tilray, which puts it in a tough spot moving forward.
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ContextLogic (NASDAQ:WISH) is an eCommerce firm primarily known for its shopping platform, Wish. The app was remarkably popular during the pandemic, with people stuck in their homes looking for bargain-shopping options.
However, the business seems to be cracking under the pressures presented by the post-pandemic world. With the souring macroeconomic environment and with greater options to choose from, consumers are abandoning Wish.
It recently posted its second-quarter results, where revenues plunged almost 80% from the prior-year period. Moreover, its bottom line is firmly in the red, despite its best efforts to control costs.
Many eCommerce apps face tougher business conditions between rising logistics, supply chain bottlenecks, and new competition from physical stores. The frailty has begun to show with ContextLogic’s business model and is unlikely to be filled anytime soon.
Mullen Automotive (MULN)
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Mullen Automotive (NASDAQ:MULN) is a pre-revenue electric vehicle (EV) business that went public last year.
It plans to manufacture and sell several EV models, including a premium sports car and a commercial EV cargo van. Moreover, it has partnerships with some of the top names, including Amazon and DelPack Logistics.
Several companies have thrown their hats in the great EV race in the past several years. However, only a handful have successfully transitioned from the manufacturing stage.
Mullen faces a tall order getting its cars to its customers, especially in the current economic climate. Its levered free cash flow balance is at a negative 23.2 million, while its cash balance stands at roughly $99 million. Hence, its cash balance will last a few months, and it might then need to opt for more debt or equity raises which significantly increase its risk.
Insignia Systems (ISIG)
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Insignia Systems (NASDAQ:ISIG) is an in-store and digital advertising solutions provider.
Though it boasts about having major corporations as its clients, it still remains an unprofitable enterprise with a nano-market cap. Its shares shot up in value during the meme stock frenzy last year but have fallen off a cliff since then.
Insignia struggles to get going amidst competitive pressures and the rising inflation rates. One of the key problems with its business is the weakness in its point-of-purchase-services, which includes signage on retail store shelves.
It’s one of its core businesses that continue to struggle amidst competitive pressures. Moreover, the company has just $396,000 in cash with a sizeable debt balance of $166,000. Revenues have been dropping by double digits over the past few quarters, complicating a potential comeback story.
Phunware (NASDAQ:PHUN) offers products and services for companies to monetize and manage their mobile application audiences effectively.
Its stock jumped when former president Donald Trump announced the launch of his own social media platform, Truth Social.
The company supported Trump’s 2020 campaign and produced an app allowing him to communicate directly with his audience. However, there hasn’t been any announcement so far of a potential partnership with Truth Social.
Apart from the Trump-related buzz, the business has suffered immensely from falling sales for years.
In 2016, it generated $47.4 million in sales, but in 2021 that number dropped to $10.6 million. The number is surprising, given how most of its peers in its niche got a major pandemic boost.
If it couldn’t grow its sales in arguably the best period for online businesses in history, you shouldn’t expect much in the future.
Houston American Energy (HUSA)
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Houston American Energy (NYSEAMERICAN:HUSA) is a micro-cap oil and gas company based in Houston, Texas. It operates in Columbia, the Permian Basis and the U.S. Gulf Coast.
HUSA also has been a popular meme stock in its sector, gaining over 128% over the past 12 months. However, the optimism surrounding the stock has little to do with its financials.
The company hasn’t achieved much over the past several years. It made barely a million dollars in sales last year, despite the massive oil and gas price surge.
Its lackluster performance is mainly due to the lack of oil production, as it produced just 14,367 barrels of oil for the whole of 2021. Its prospects remain more or less the same this year, which makes it a highly unattractive bet.
On the date of publication, Muslim Farooque did not have (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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.