Recently we’ve seen certain stocks soar sky-high despite little to no fundamentals to support the surge in prices. A few weeks ago, the 29 stocks in the Russell 2000 that traded under $1 per share soared almost an average 80% in just a week. So, I figured I’d better remind you: All that glitters is not gold.
Right now, I believe that the biggest “stock scam” is Nikola Corporation (NKLA), which builds electric trucks that run on hydrogen fuel cell technology. The company has just started taking deposits for its Badger pickup truck, but the problem here is its founder, Trevor Milton, who is out there hyping the hydrogen fuel cell technology.
The stock briefly hit a $28 billion market cap, putting it at the same valuation as Ford Motor (F). This was after Milton said, “My goal is to take the throne from the Ford F-150.” While Milton was hyping Nikola, he was also selling some of his stock. He’s now the proud homeowner of a $32.5 million home in Utah – the most expensive in the state.
Prior to all this, Nikola had a market cap of barely $3.3 billion and no significant revenue to justify its inflated value. However, now that the company commenced soliciting Badger deposits on June 29, at least one Wall Street firm is recommending NKLA on the hope it could attract some lucrative investment banking business.
As a disciplined growth investor who only invests in fundamentally superior stocks, I recommend that investors stay away from companies that sell phantom products and empty promises, with no significant forecasted revenue or earnings. This stock’s bubble will be pricked, and investors will be left holding Nikola’s bag.
Unfortunately, a lot of inexperienced investors are pouring money into more speculative plays. Interestingly, Leon Cooperman and Princeton economist Burton Malkeil commented that millennial investors are unwisely speculating in low-priced stocks and day trading.
It also doesn’t help that some folks with little to no experience are now touting themselves as the experts. Barstool Sports founder, Dave Portnoy, went so far as to tweet that “There’s nobody who can argue that Warren Buffett is better at the stock market than I am right now. I’m better than he is. That’s a fact.”
It’s true that when Buffett sold his stake in Delta Air Lines (DAL), Southwest Airlines (LUV), American Airlines (AAL) and United Airlines (UAL) in early May, it cost him more than $4 billion.
Airline stocks did stage a temporary rebound shortly after. In mid-May to early June, DAL, AAL and UAL flew more than 160% before crashing back down in mid-June as coronavirus cases spiked. DAL, AAL and UAL fell 28%, 44% and 32%, respectively. While the stocks currently trade above their mid-May lows, there are still down more than 50% year-to-date. And with declining earnings and sales growth, a significant near-term rebound just to get the stocks to breakeven is unlikely.
If you’ve been following me, then you know that in May, and again in June, I recommended folks stay away from the airlines, as they were all listed as “sells” in Portfolio Grader (and they still are today). While the stocks seemed like great bargain opportunities, their earnings and sales growth were nonexistent. In fact, last week the NASDAQ 100 even delisted UAL and replaced it with DocuSign, Inc. (DOCU). While UAL was losing money, DOCU was posting year-over-year double-digit earnings and sales growth. Investors looking for growth sure aren’t going to find it with UAL.
Now, I will say this. None of this is evidence that you should start speculating on penny stocks like the ones Dave Portnoy is out there making videos about. Portnoy himself did later admit on CNBC’s Fast Money that he has no “great knowledge” of stocks and added that if retail investors follow his actions and potentially lose money on a rare penny stock mention, he “can’t be held responsible for total idiots.”
So, as someone with more than 40 years of experience in the stock market, I urge investors to invest wisely and be strategic. Don’t chase stocks with no runway (so to speak); they are bound to fizzle out as Wall Street wises up.
Instead, focus on the fundamentally superior stocks. This puts you in prime position to benefit from that flight to quality. These are the companies that post strong sales and earnings growth, with a history of positive earnings surprises.
It’s also important that you manage your risk through allocation. I recommend following my 60%/30%/10% rule. Essentially, you allocate 60% of your portfolio to conservative stocks, 30% to moderately aggressive stock and 10% to aggressive stocks.
You also want to diversify and invest in high-quality stocks across a variety of sectors. The last thing you want to do is put all your eggs in one basket, but, unfortunately, many investors fall into the trap of having too much exposure in one stock. If that stock goes south, then that portfolio is wiped out.
And, lastly, know when to sell. Whether you are a short- or long-term trader, you need to know when to take your profits off the table or cut the losers. When a stock grows too volatile or the company’s profit margins begin to contract, it’s time to move on to better opportunities. My Portfolio Grader tool uses these criteria (and more) to assign each stock a grade. When a stock receives a Total Grade of a D or F, it should be your cue to sell.
And I practice what I preach. In my Platinum Growth Club, our exclusive Model Portfolio is filled with the crème de la crème of stocks. But I also do not hesitate to cut a stock if it becomes too hot to handle, just like I did with Paycom Software, Inc. (PAYC) back in May. Earnings momentum was slowing, and analysts were aggressively lowering their earnings estimates. That’s a reliable sign that an earnings miss is likely. So, I advised my subscribers to book our triple-digit gain.
I also take allocation very seriously. In both my Growth Investor and Breakthrough Stocks services, the Buy Lists are broken down according to my 60%/30%/10% rule. And my Buy Lists are filled with stocks from all sorts of sectors, ranging from cloud computing, REITs, biotech, insurance, restaurants and many, many more.
I also offer an Allocation Tool for my Platinum Growth Club subscribers to help them blend the stocks within my Model Portfolio. It’s as simple as choosing the allocation that feels most comfortable, plugging the amount of money you want to invest, and the tool will show you how to blend the stocks in the Model Portfolio accordingly – right down to the number shares you ought to own.
Again, I say: all that glitters is not gold. That goes for airline stocks, companies with no sales like Nikola or companies going bankrupt like Hertz (HTZ). That particular stock soared 671% – from just $0.81 per share to $6.25 per share – in four days. It’s now back to trading around $1 per share!
At the end of the day, these glittery stocks will fall like rocks. But the truly golden ones, like the fundamentally superior stocks I recommend in Platinum Growth Club, will have the staying power to climb higher over the longer term.
Click here to try Platinum Growth Club and see all my latest buy and sell recommendations. Once you sign up, you’ll have access to all of my services and can read my Growth Investor Monthly Issue for July, which I just posted yesterday. In it, I share four new sells and buys, as well as three hot sectors I like right now. Sign up here for all the details.