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Avoid “Stock Scams” Like Nikola and Hertz

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 (NASDAQ: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 (NYSE: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 (NYSE:DAL), Southwest Airlines (NYSE:LUV), American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ: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 my 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 UAL even got kicked off the Nasdaq 100 and replaced with DocuSign, Inc. (NASDAQ: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.”

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