$Moderna, Inc.(MRNA)$$American Airlines(AAL)$ $Sundial Growers Inc.(SNDL)$
By Sean Williams
- Although the broader market heads higher over the long run, not all stocks will be winners.
- These widely-held stocks are full of risks and red flags.
What's popular isn't always what's profitable from an investing standpoint.
It's a great time to be an investor in the stock market. Even accounting for the recent pullback in equities, the benchmarkS&P 500has rallied approximately 100% from its pandemic low set in March 2020. Backing out a bit further, the widely followed index has gained a hearty 221%, not including dividends, over the trailing decade.
While the broader market has a tendency to head higher over the long run, not all stocks will necessarily follow suit. Investors are occasionally taught a tough lesson that what's popular isn't always what's profitable -- at least from an investment perspective.
IMAGE SOURCE: GETTY IMAGES.
Moderna
The first highly popular stock for investors to avoid isbiotech giant Moderna.
Chances are that most people are familiar with the Moderna name in the wake of the COVID-19 pandemic. The company's vaccine, Spivevax (mRNA-1273), is one of only a handful of COVID-19 vaccines that generated north of 90% efficacy in clinical trials. After recording more than $18 billion in full-year sales in 2021, the company should hit a minimum of $19 billion in sales this year, based on advance purchase agreements.
However, the COVID-19 treatment space is growing more crowded by the day, and (thankfully!) the mortality figures associated with COVID-19 have fallen as newer variants of the disease have emerged. With initial inoculations out of the way in many higher-margin developed markets, Moderna will face a more challenging landscape to establish itself as a key player in booster shots, variants-specific vaccines, and combination vaccines.
What's most worrisome is that Moderna's nearly $67 billion market cap is almost entirely reliant on a single therapy. While the company does have a lot of cash andother vaccines/therapeutics in clinical studies, these non-COVID-19 treatments are still a way away from generating revenue. Even with a low price-to-earnings ratio at the moment, there's a lot of built-up risk in relying on a single vaccine to support a $67 billion market cap.
IMAGE SOURCE: AMERICAN AIRLINES.
American Airlines Group
A second ultra-popular stock thatwould be better off groundedis major airlineAmerican Airlines Group.
American Airlines is one of many beaten-down transportation stocks that retail investors have rallied around as a pandemic-based reopening play. Since airlines tend to perform well when the U.S. economy is growing, and periods of economic expansion typically last years, investors would appear to be betting on a healthy bounce in consumer spending and U.S. economic activity.
While there are some tangible signs that things have gotten better forairline stocks-- American lifted its revenue forecast a little over a week ago -- there's also no shortage of red flags. For instance, an increase in passengers and higher ticket prices is being offset by rising jet fuel costs and higher labor expenses. Despite sales falling by a double-digit percentage from pre-pandemic levels, the company's cost per available seat mile has increased by a double-digit percentage. Translation: Quarterly losses should continue for the foreseeable future.
The other issue for American Airlines Group is that ithas one of the worst balance sheetsin the airline industry. Though the pandemic did the company no favors, shareholders are also reeling from management's decision to modernize its fleet well before it was necessary. American Airlines is now sitting on over $25 billion in net debt. In short, it has little financial flexibility in a capital-intensive industry.
Sundial Growers
The third ultra-popular stock investors should keep their distance from is Canadian cannabis company Sundial Growers.
Over the next five years, cannabis has the potential to be one of North America's fastest-growing industries. According to a recent report from BDSA, Canadian pot sales are forecast to rise from an estimated $3.8 billion in 2021 to $6.3 billion by 2026 (an 11% compound annual growth rate). With Sundial sitting on $571 million in unrestricted cash and no debt, as of Nov. 9, 2021, its shareholders are clearly excited about its prospects to rake in the green, as well as enter the U.S. market (if Congress ever passes federal cannabis reforms).
Unfortunately, Canadian marijuana stocks have been disappointing on all fronts. More specific to Sundial, the company switched its focus from wholesale cannabis to retail to take advantage of the higher margins associated with the retail side of the equation. But doing so meant rebuilding its brand from scratch. On an operating basis, and excluding one-time adjustments like derivative warrant revaluations,Sundial continues to lose money.
What's more, Sundial is a serial diluter. Instead of just issuing enough common stock to pay off its debt, management failed to turn off the spigot. Between Oct. 1, 2020 and Nov. 9, 2021, Sundial's outstanding share count skyrocketed from 509 million to about 2.1 billion! This share-based dilution makes it highly unlikely the company will ever generate meaningful earnings per share.
Resource: Motley
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