Logically, it would seem that the majority of overvalued stocks are in the large-cap, or least mid-cap, category. After all, the most overvalued stocks by definition have run the furthest. It’s hard to make a huge, sustained rally while keeping a relatively low market capitalization.
That logic usually holds even more true in a bull market. After all, small-cap stocks as a whole have higher risk and higher reward. They tend to be more sensitive to sentiment and macroeconomic factors as well. When stocks as a whole are rallying, small caps almost always do the same.
In fact, since early November, small-cap stocks have led this market. The kind of exuberance we’re seeing right now has been more than enough to shoot many former small caps (typically considered those with a market capitalization under $2 billion) into higher categories.
But there are exceptions. Even small-cap stocks can have big-time valuation concerns. Here are four current examples:
- Ideanomics (NASDAQ:IDEX)
- Dillard’s (NYSE:DDS)
- Bally’s Corporation (NYSE:BALY)
- Zomedica (NYSEAMERICAN:ZOM)
4 Overvalued Stocks: Ideanomics (IDEX)
Of late, Ideanomics has positioned itself as an electric vehicle play, and investors seem to be buying as a result. Thanks in large part to the company’s business of buying and reselling EVs in China, along with the purchase of an EV charging station developer, IDEX has soared 722% over the past year.
Of course, Ideanomics in the past positioned itself as a cryptocurrency play. It had a crude oil trading business. It’s talked up efforts in fintech, and with the recent acquisition of title company Timios Holdings, apparently still has aspirations on that front.
The problem is that all these businesses seem more like Ideanomics attracting investors than actually creating long-term value. The Chinese EV business is losing money, and revenue is not particularly given impressive given single-digit gross profit margins. The fintech efforts have sputtered repeatedly.
And yet Ideanomics now has a fully diluted market capitalization pushing $2 billion. With the acquisitions totaling less than $100 million in cost, and the rest of the business unproven at best and barely existent at worst, that figure alone makes IDEX one of the most overvalued stocks in the market.
Even before the novel coronavirus pandemic arrived, Dillard’s was struggling. In the fiscal year ending Feb. 1, Dillard’s comparable store sales declined 1%. Due in part to lower gross margins, net income plunged 35% year-over-year.
Once the pandemic hit results, the trend only worsened. Year-to-date revenue in the current fiscal year is off by more than one-third, and Dillard’s profit has reversed to a loss.
Because of the performance before and after the pandemic, and the broader pressures facing department stores, short sellers have taken aim at DDS stock. About 30% of the stock’s float is sold short at the moment, though that figure is inflated by still-substantial family ownership of the company.
And because short sellers have taken aim at DDS stock, Redditors got involved. As with GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), individual buyers tried to engineer a “short squeeze.” DDS stock didn’t see quite the rallies of other r/WallStreetBets targets, but it did better than double in a couple of weeks.
As with GME and AMC, DDS has given back a good chunk of the gains. As with those stocks, it has further to fall. Even looking at results for the last full year before the pandemic, DDS trades at 18.5x earnings.
That’s seems far too high a multiple for a business that was heading in the wrong direction to begin with. The acceleration of e-commerce growth driven by the pandemic adds another headwind for Dillard’s, where the penetration of online sales remains rather low.
Whether the recent rally was a short squeeze or just coordinated buying remains unclear. What is clear is that the rally is highly likely to reverse.
Bally’s Corporation (BALY)
To be fair, the optimism toward BALY stock in general makes some sense. Bally’s has managed to carve out an intriguing niche in the gaming business going forward.
The company has taken advantage of the merger that created Caesars Entertainment (NASDAQ:CZR) to pick up properties on the cheap. The former Twin Rivers added the Bally’s name and intellectual property as well. It then leveraged that IP and a larger casino base to drive a massive deal with Sinclair Broadcasting (NASDAQ:SBGI). Sinclair will rebrand its Fox regional sports networks under the Bally’s brand.
That said, BALY stock now has better than doubled since the beginning of November. Sports betting is going to be a big market, but myriad competitors have larger edges than Bally’s even with the Sinclair deal. And the company’s brick-and-mortar footprint still pales in comparison to most regional operators.
Certainly, I’d rather own BALY than fuboTV (NYSE:FUBO), which too is pursuing a strategy based on combining broadcasting and gambling. But in both cases investors seem simply too optimistic toward a sports betting industry whose revenue may not be as large as some bulls suggests. And valuation is a concern for BALY, too, particularly after the rally of the past three-plus months.
One of the crazier stocks of the past couple months, Zomedica stock simply has rallied too far. In three months, ZOM has gone from 8 cents to nearly $3.
Investors are optimistic toward the pending launch of the company’s Truforma platform, which will provide diagnostic tests for thyroid and adrenal conditions in cats and dogs. But at this point, including the impact of options and warrants, Zomedica is being valued at $1.6 billion, against less than $50 million in early November.
With Truforma’s underlying technology actually owned by Qorvo (NASDAQ:QRVO), and the addressable market small, it seems nearly impossible for Zomedica to grow into this valuation. As with most overvalued stocks, the issue isn’t that Zomedica’s business isn’t viable. Rather, it’s that the company has little, if any, chance to grow into the valuation the current ZOM stock price suggests.