The stock market is on the upswing, with more speculative companies in particular making big moves in May. As such, there’s a lot of interest in volatile penny stocks today.
However, investors should avoid buying most penny stocks. In general, companies end up with a low stock price because of a structural problem, be it a failed business model, a bad balance sheet, or a struggling industry, among other factors.
There are some penny stocks that go on to produce great fortunes. But investors should use great prudence when considering low-priced shares. That’s because, more often than not, there are tremendous risks in those investments. And, for these three overvalued penny stocks in particular, there is little reason to own shares right now.
Mullen Automotive (MULN)
Mullen Automotive (NASDAQ:MULN) is a small company focused on disrupting the electric vehicle industry. Over the years, it has announced a series of promising acquisitions, partnerships, and future planned growth ventures.
However, so far, there’s little to show for these announcements. As the company notes in its recent 10-Q filing: “The Company has not generated revenue to date and has accumulated losses since inception.” That’s right, Mullen has not generated any revenues whatsoever. Furthermore, it had a working capital deficit as of March 31, and will need to raise a lot more capital to keep its operations afloat.
Additionally, Mullen recently engaged in a 1-for-25 reverse stock split to get shares back above the $1 threshold and maintain compliance with the Nasdaq listing requirements.
However, even that large reverse split might not be enough, as shares have tumbled back below the key $1 level in recent days. With the company running low on funds, and without many near-term commercial prospects, Mullen seems set for further declines. Among the negative catalysts on deck, it appears that the Russell 2000 Index will kick MULN stock out on June 26, which will likely trigger further selling.
fuboTV (NYSE:FUBO) is a company attempting to revolutionize the streaming TV market. The company’s appeal is built around having access to live streams of sporting events, though it offers a broader range of content.
FUBO stock soared in prior years around hopes that the company could incorporate sports betting into the platform. However, there’s been little tangible progress in terms of turning that potential into profits. It appears the company has now shut down that line of business.
Meanwhile, the company’s core streaming TV business has a big problem – sports rights are expensive. Indeed, fuboTV has to pay a tremendous sum for the rights to the content that it offers its subscribers.
As a result, in its most recent quarter, fuboTV spent 93% of its revenues on subscriber-related expenses and another 6% on broadcasting and transmission. That leaves a tiny amount for everything else, including general and administrative costs, tech platform development, sales and marketing, and so on.
Even on an adjusted EBITDA basis, fuboTV remains significantly unprofitable, to say nothing of operating income. The company has been burning through about $75 million in cash each and every quarter. With an unproven business model and a falling stock price that limits potential fundraising efforts, it’s unclear if fuboTV will be able to survive in the coming months and years.
Canopy Growth (CGC)
Canopy Growth (NASDAQ:CGC) was at one point expected to become a leader in the emerging Canadian cannabis market. However, as time passes, it’s becoming increasingly clear that Canopy is unlikely to live up to those prior expectations.
For one thing, the Canadian cannabis market failed to reach the total market size that analysts had previously projected. Combine that with heavy competition, and most of Canada’s marijuana companies, including Canopy, have continued to run large operating losses.
Indeed, if Canopy were still growing its operations, there might be some hope of a turnaround. However, it seems that the firm is dying on the vine. In its most recent quarter, Canopy reported a stunning 28% decline in revenues year-over-year. This was in conjunction with a massive operating loss. There’s even a failure to reach breakeven on an adjusted EBITDA basis. These metrics indicate that Canopy will be quickly burning through its cash balance. Large operating losses combined with shrinking revenues tends to lead to a death spiral.
Adding insult to injury, Canopy is now having various regulatory and accounting issues.
The Nasdaq is concerned about Canopy’s plans to enter the U.S. market. Canopy is having to restructure operations to ensure that its NASDAQ listing isn’t revoked. There is also a class action lawsuit against Canopy for allegedly not filing its prior financial statements correctly. And recently, Canopy disclosed that it won’t file its current annual report on time.
All this makes Canopy one penny stock to avoid. Cannabis companies are struggling enough as is. Throw in this mix of poor financials and regulatory concerns, and Canopy is clearly not worth owning.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Ian Bezek did not have (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.