Simple trading strategies like investing in stocks with high short interest deliver results like a short-squeeze rally. Quick returns in these stocks have little to do with the business fundamentals. Investing in purely speculative stocks has been rewarding in the past, particularly during the meme stock euphoria of 2021. The market of 2023 is completely different, and there are risky meme stocks to avoid, even if the short interest in these stocks is high.
To elaborate, purely speculative meme stocks are unlikely to surprise on the upside. Even if I had to take some risk, I would look at penny stocks with average to good business fundamentals. Recently, I have discussed penny stocks and meme stocks that have potentially positive business catalysts.
I believe that the risky meme stocks discussed in the column will continue to trend lower. A deep correction in these stocks does not imply that these fundamentally weak names are undervalued.
Let’s discuss the reasons to be bearish.
Arrival (ARVL)
Arrival (NASDAQ:ARVL) stock has been in a sustained correction mode. The markets have punished the stock with the electric vehicle company’s plans characterized by delays and cash burn. Amidst intensifying competition in the industry, I don’t see Arrival surviving.
Arrival entered the EV markets with a promise of delivering multiple micro-factories. The company’s plan included electric vans, buses, and passenger cars. Currently, the company has narrowed its focus to electric vans, and the scalability of the business model remains questionable. Without a doubt, cash burn will sustain in the next few years. The best-case scenario is, therefore, Arrival surviving with a continued dilution of equity.
As of March 2023, Arrival reported $130 million in cash. Further, the merger with Kensington Capital is likely to bring $283 million of trust assets to the company. However, this news has failed to generate excitement in the markets as investors focus on execution capabilities. ARVL stock is, therefore, among the top meme stocks to avoid.
Mullen Automotive (MULN)
Mullen Automotive (NASDAQ:MULN) stock has plunged by 80% in the last month. It’s another EV company with minimal chances of survival. I would avoid the meme stock at its current level of 23 cents.
What’s surprising to note is that Mullen had a flurry of positive announcements in the recent past. This includes a new vehicle purchase agreement and the formation of a new entity focused on EV technology. However, if we understand the language of the markets, these announcements have failed to make any positive impact.
Mullen also claims to be on track for production of Class 3 commercial vehicles by September 2023. However, it’s worth noting that the company’s cash position was just $86.7 million as of March. Given the plunge in MULN stock, massive equity dilution would be needed to ensure business continuity.
With intense industry competition and better investment options, the outlook for MULN stock is bearish. My view is evident from the fact that short interest remains high at 14% even after the massive correction.
SNDL (SNDL)
The performance of SNDL (NASDAQ:SNDL) stock has been disappointing, with a correction of 32% for the year. I believe that SNDL is likely to survive, unlike the first two companies discussed.
However, there are two reasons to believe that SNDL stock will continue to trend lower. First, a regulatory headwind for the cannabis industry is a concern and will continue to impact the growth outlook. Furthermore, among peers, there seems to be better investment or speculative options. These include Tilray (NASDAQ:TLRY) and Cronos (NASDAQ:CRON).
As an overview, SNDL claims to be Canada’s largest private-sector liquor and cannabis retailer. As of Q1 2023, the company had $579.9 million in capital deployed in credit and equity investments. The results from these investments largely depend on how the industry outlook changes based on regulatory factors.
Overall, SNDL stock might continue to trend lower, and it’s best to avoid it even after a meaningful correction.
On the date of publication, Faisal Humayun did not hold (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.