There’s been a great deal of vociferous debate about whether we’re in the midst of a stock market bubble.
Opponents of that notion cite, among other points, the ultra-low interest rates, the Fed’s tremendous liquidity injections, and the rebound from the novel-coronavirus pandemic. For proponents 0f the stock market bubble idea, the historically high valuations of the S&P 500, measured by its price-earnings ratio and percentage of U.S. GDP, show that the bubble is real.
Nearly everyone seems to agree, however, on a different, but related point. That is, there is widespread agreement that many individual stocks are still trading at ridiculous valuations.
But there is no consensus on which stocks have become bubbles. To paraphrase an old saying, one person’s bubble stock is another’s person’s growth stock with huge potential. For example, many people believe that Tesla (NASDAQ:(TSLA)) stock is a great investment, but InvestorPlace columnist Wayne Duggan suggests that it’s trading at “a ridiculous valuation.”
My definition of a bubble stock is easily understood, if largely subjective. Specifically, I believe that companies that have very high valuations, lack strong competitive advantages, are far from profitability, and are not growing extremely quickly are probably “bubblicious.”
There may be exceptions to this rule; for example, if a company has all of the latter characteristics but also has a tremendous first-mover advantage, its shares may not be in a bubble. But I believe it’s best, on the whole, to avoid the stocks of companies with all of the characteristics that I listed above.
In the pages below, I’ll explain why I think these stocks meet the criteria of a stock market bubble:
- Workhorse (NASDAQ:WKHS)
- Fisker (NYSE:FSR)
- Canopy Growth (NASDAQ:CGC)
Stock Market Bubble Stocks: Workhorse (WKHS)
According to Yahoo Finance, the electric-vehicle maker has a market capitalization of $1.57 billion and had just $1.39 million of revenue over the 12 months that ended in December. Its gross profit was a loss of $11.67 million.
In the first quarter of this year, Oppenheimer expects the company to deliver only 10 EVs.
Not only has the company (famously) lost out on a huge U.S. Postal Service deal for which it was competing, but (much less famously), its deal with UPS (NYSE:UPS) appears to have collapsed. As I noted in a prior column, Fuzzy Panda reported that UPS is now relying on Arrival (NASDAQ:ARVL) to meet its EV needs, and UPS has acquired only 350 of 1,000 Workhorse trucks that it ordered in 2018. Further, UPS’ recent enthusiastic comments about Arrival suggests that the report is accurate.
Workhorse’s apparent failure to impress UPS and the Postal Service suggests that the EV maker indeed lacks strong competitive advantages. And as I’ve reported previously, multiple sources have reported that customers expressed dissatisfaction with its work.
One of the automaker’s supposed points of differentiation is that its founder and CEO, Henrik Fisker, is a great designer of automobiles. By all accounts, Fisker is indeed a superb auto designer and I have no doubt that these statements are accurate.
On the other hand, I also have no doubt that the many other automakers spending tens of billions of dollars on EVs have hired great auto designers.
Another supposed point of differentiation for Fisker is the price of its upcoming Ocean SUV. But as I pointed out in a recent column on the automaker, multiple other electric SUVs are being priced in a similar range.
Additionally, I believe that if the Ocean’s environmentally friendly raw materials start to catch on with consumers, competing automakers will be able to replicate that approach fairly quickly. And by the time the Ocean starts being mass-produced at the end of 2023, Fisker could also face competition from Chinese EV makers.
Fisker’s operating income in 2020 was a loss of $43.3 million, and there were more than 12,000 reservations for the Ocean as of February, which is far from impressive, given the stock’s valuation. Finally and most importantly, Fisker’s brand power is way behind that of many competing names, from Tesla to GM (NYSE:GM) to Ford (NYSE:F).
Despite all of these issues, FSR stock has a large market capitalization of $3.86 billion.
Canopy Growth (CGC)
Like many of its peers, marijuana seller Canopy Growth has a huge valuation; according to Yahoo Finance, its trailing price-sales ratio is a humongous (for a consumer goods company) 24.5.
And yet, Canopy is very far from profitability, as in 2020 its cash flow from operations was a loss of $437 million, while it lost another $279 million on its investments.
After conducting research on Canopy Growth and reading several columns written by CGC stock bulls, I was not able to find any evidence that it has any meaningful competitive advantages.
Instead, bulls justify the company’s huge valuation because they are assuming that the U.S. will legalize marijuana this year. But as I explained in my recent column on Aphria (NASDAQ:APHA), the Senate looks poised to reject, not approve, legalization. Therefore, Canopy’s gigantic valuation is completely unjustified.
On the date of publication, Larry Ramer was long GM and ARVL. He did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.