Exit Alert: 3 Overhyped Stocks With Weak Fundamentals
Throughout the history of financial markets, there is ample evidence of irrational investor behavior leading to euphoria. Be it the Tulip Mania of 1634 or the Housing Bubble and the subsequent financial crisis, markets tend to react on the extremes. Even today, I can spot quality stocks deeply undervalued and ignored. On the other hand, there are overhyped stocks to sell that represent companies with weak fundamentals.
I must add here that investors can leverage on bullish sentiments for an industry to make quick money. That can be through exposure to fundamentally weak stocks. However, it’s important to curb the greed and exit at the right time. Further, not all stocks in a downtrend become attractive. There are overhyped stocks that look attractive on deep correction, but it’s a value trap.
With the markets facing macroeconomic headwinds, it’s important to be cautiously optimistic. I would remain overweight on blue-chip stocks and fundamentally strong growth stocks. However, ideas with weak fundamentals and stretched valuations need to be avoided or sold. Let’s discuss three overhyped stocks to sell now.
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GameStop (GME)
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GameStop (NYSE:GME) stock has remained in a sustained downtrend. However, the correction does not imply that the stock is undervalued. GME stock remains expensive at a forward price-earnings ratio of 97. While the stock remains popular among meme stocks, it’s a good idea to exit with further downside likely.
For Q3 2023, GameStop reported revenue of $1 billion. On a year-on-year basis, revenue has continued to witness a decline. At the same time, GameStop continues to report operating-level losses.
It’s worth noting that GameStop had $1.2 billion in cash and equivalents as of Q3 2023. That’s unlikely to be a positive catalyst, with the core business remaining sluggish.
I must add that hardware as a percentage of total sales was at 54.7% for the first 10 months of 2023. On a year-on-year basis, hardware sales increased as a percentage of total sales. With the gaming hardware business remaining intensely competitive, it’s unlikely there will be any significant margin improvement.
Nio (NIO)
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Nio (NYSE:NIO) stock has always been in the limelight when talking about Chinese EV stocks. However, Nio has disappointed, and the stock has been in a correction mode. I further believe the stock will continue to erode value for investors.
If I had to choose a Chinese EV stock for long-term exposure, it would be names like BYD Company (OTCMKTS:BYDDF) and Li Auto (NASDAQ:LI). From the perspective of fundamentals and key margins, these ideas are attractive compared to Nio.
For Q3 2023, Nio reported revenue growth of 45.9% on a year-on-year basis to $2.4 billion. However, the company reported an operating loss of $664 million for the period. In an intensely competitive market, operating level losses will likely sustain.
While Nio reported a strong cash buffer of $6.2 billion as of Q3, dilution will likely impact sentiments. In December 2023, the company announced a $2.2 billion strategic investment from CYVN Holdings L.L.C.
Novavax (NVAX)
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Novavax (NASDAQ:NVAX) stock was among the hottest names during the COVID-19 pandemic. However, the biopharmaceutical company turned out to be a laggard in the COVID-19 vaccine race. As a result, the stock has plummeted.
In the recent past, NVAX stock has, however, surged by more than 50% from 52-week lows of $3.5. For traders, it’s a good opportunity to exit. I believe the stock will trend lower with fundamentals remaining weak.
It’s worth noting that the company’s COVID-19 vaccine and R21 for malaria have been authorized. However, the stock reaction is a clear indication that these candidates won’t likely drive growth. The current pipeline has a COVID-19 and seasonal influenza vaccine combination in phase two.
Therefore, the pipeline is narrow and is unlikely to create value. Of course, there is a case for the addition of new molecular entities in the pipeline. However, it will be years before the impact of commercialization is seen.
On the date of publication, Faisal Humayun did not hold (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.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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