For the past 15 months, Wall Street and investors have enjoyed a historic bounce-back rally. The benchmark S&P 500 has gained more than 90% since hitting its bear-market bottom on March 23, 2020.
While a number of high-quality and innovative businesses have led this rally, it's also allowed quite a few terrible companies to thrive. It's my suggestion that the following five ultra-popular stocks be avoided like the plague in July.
Image source: Getty Images.
Coinbase Global
First up is cryptocurrency exchange and ecosystem Coinbase Global (NASDAQ:COIN). Coinbase is popular given how quickly its revenue and profits surged in the first quarter as investors piled into the likes of Bitcoin and Ethereum. The problem is there are a trio of catalysts working against the Coinbase brokerage model.
To start with, there's nothing that prevents competing exchanges from undercutting Coinbase Global's fees. It might have the verified user advantage at the moment, but don't underestimate the willingness of crypto investors to jump ship to save on transaction fees. We witnessed it among traditional brokerages, and the industry eventually wound up going commission-free.
Second, crypto has a history of boom-and-bust cycles. Bitcoin has had three separate instances over the last decade where it's shed at least 80% of its value. This is an entirely momentum-based investment, and when upside momentum dries up, so does Coinbase's trading revenue. Following a 2017 peak, Coinbase saw its revenue nearly halve in subsequent years.
And third, the past four weeks, through June 28, saw outflows from crypto of $257.3 million, according to CoinShares Digital Asset Fund Flows Weekly. This is more evidence that interest in crypto is already dwindling with these assets well off their highs. Suffice it to say, Coinbase is not a stock you're going to want to own moving forward.
Image source: Getty Images.
Cassava Sciences
Another ultra-popular company with a terrible risk-versus-reward ratio is clinical-stage biotech stock Cassava Sciences (NASDAQ:SAVA).
Cassava rightly made waves in February when it announced positive clinical data from an interim analysis of simufilam as a treatment for Alzheimer's disease. The open-label trial showed improvement in cognition and behavior at the six-month mark, and more recently allowed Cassava to outline its plans for a phase 3 trial involving its lead drug candidate.
I'd love for simufilam to be successful, but history has shown that Alzheimer's is one of the toughest-to-treat diseases. With the exception of Biogen's Aduhelm, which was approved by the Food and Drug Administration (FDA) but has been criticized heavily for its lack of clear benefit, every Alzheimer's drug has failed in late-stage studies for more than a decade. All investors have to go on is early stage, open-label data from a trial that aimed to enroll 100 patients. It's not been uncommon to see positive early or-mid-stage results get pulverized come a large phase 3 Alzheimer's trial.
Although Cassava raised a good amount of cash to continue its research, history suggests that simufilam's chance of success is very slim. That makes Cassava Sciences easily avoidable.
Image source: Getty Images.
GameStop
If you've been following the retail trade movement (i.e. Reddit stocks), whereby retail investors are seeking out heavily short-sold companies and attempting to effect a short squeeze, you probably know video game and accessories retailer GameStop (NYSE:GME).
On one hand, GameStop has been able to capitalize on its recent fame by selling stock to raise capital for its ongoing transformation to a digital gaming company. It's a much-needed move after e-commerce sales jumped 191% in fiscal 2020 and more than quadrupled during the holiday season, from the prior-year period.
However, these capital raises don't overlook the fact that the previous management team failed the company. For two decades, a brick-and-mortar gaming model worked well. However, sticking to this brick-and-mortar model when gaming was going digital left the company in a precarious position. Today, GameStop continues to lose money, even with rapid e-commerce growth, and saw its same-store sales decline by almost 10% last year. Digital sales may be growing, but total revenue is going nowhere as GameStop shutters its physical locations to lower costs.
GameStop is in no way a bankruptcy candidate, and I can actually see a path to profitability years down the road. But with that being said, the gains it's seen make no sense given the long transformation and operating losses that lie ahead.
Image source: Getty Images.
Inovio Pharmaceuticals
Biotech stocks can offer ample opportunity, or in Inovio Pharmaceuticals' (NASDAQ:INO) case, suck the lifeblood out of long-term investors.
Inovio would appear to be an intriguing company based solely on paper. It has a pipeline that currently includes over a dozen clinical candidates to treat cancer, infectious diseases, and human papilloma virus. The most-promising looks to be INO-4800, the company's coronavirus disease 2019 (COVID-19) vaccine candidate that's readying for phase 3 studies. But if you do any digging into Inovio's clinical performance, you'll be sorely disappointed.
For example, INO-4800 had been placed on partial clinical hold in the U.S. while regulators requested additional data on Inovio's vaccine and its delivery system, Cellectra. More recently, INO-4800 had its late-stage funding pulled by the U.S. government, which is why it's now seeking an international study for its COVID-19 candidate.
If you think I'm unfairly picking on Inovio for its COVID-19 struggles, pan out even further. In four decades, Inovio hasn't managed to get a drug approved by the FDA. This isn't me wishing bad things on Inovio -- this is the reality that hope and results haven't aligned with this company for a long time. Until Inovio proves itself in a late-stage clinical trial, it's worth avoiding.
Image source: Getty Images.
AMC Entertainment
Finally, I can't forget ongoing pump-and-dump scheme AMC Entertainment (NYSE:AMC). While retail investors were able to claim victory by effecting a short squeeze in January after AMC saved itself by issuing a bunch of shares and high-interest debt, the most recent run-up has nothing to do with a short squeeze. Rather, it's based predominantly on hype, the purposeful obfuscation of concrete fundamental data on message boards, and broad-based, blatant misinformation.
AMC's retail investors would like you to believe that fundamentals don't matter -- but try driving a car without an engine and see how far you get. AMC is dealing with a 19-year decline in industry ticket sales and is seeing some of its film exclusivity evaporate as movie studios lean on streaming. There will be a place for movie theaters, but AMC's addressable market keeps shrinking with each passing year.
AMC's retail investors would also have you believe the company is in great shape after raising $2 billion in capital. While it has put bankruptcy rumors in the near-term on the backburner, the 2027 bond price is nowhere near par. Why, you ask? Because bondholders aren't convinced that AMC is going to escape bankruptcy.
I've seen enough pump-and-dump campaigns in my life to recognize them, and AMC checks all the boxes. My suggestion isn't to short AMC. My suggestion is to avoid it completely. All pump-and-dump schemes eventually collapse, and AMC will be no exception.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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