The Reddit stock trading boom took the stock market by storm. In January, shares of dozens of companies simultaneously blasted off. This happened as ordinary investors realized their tremendous power if they operated as a group. In particular, by buying both shares and call options in stocks with high short interest, the r/WallStreetBets crowd generated a tremendous amount of upward pressure on prices, leading to historic squeezes.
Some of the stocks that benefited from this sort of move remain at much-higher prices today. Others, however, are starting losing their gains. The issue with short squeezes, after all, is that they tend to be fleeting. Unless the company in question can capitalize off its momentum and turn it into tangible fundamental progress, shares tend to ultimately return to their fair value.
And in the case of many of the Reddit stocks, that fair value is probably pretty low. After all, you tend to see high short interest in the shares of companies that have the most challenged business outlooks. Short sellers typically don’t race to bet against firms that are in fine financial health, after all.
In any case, as the social media enthusiasm dims a bit, look for these seven popular Reddit stocks to face challenging days ahead:
- Luckin Coffee (OTCMKTS:LKNCY)
- Blink Charging (NASDAQ:BLNK)
- Ayro (NASDAQ:AYRO)
- Ideanomics (NASDAQ:IDEX)
- Koss (NASDAQ:KOSS)
- Washington Prime (NYSE:WPG)
- Eastman Kodak (NYSE:KODK)
Reddit Stocks: Luckin Coffee (LKNCY)
I’ve been more patient with Luckin Coffee than most. Even after its accounting scandals, I argued that there might still be a shot at recovery for Luckin. And, indeed, the stock bounced from $2 to as high as $13 at one point after the scandals last year. However, even I’ve thrown in the towel on the Chinese coffee chain.
That’s because, in February of this year, Luckin officially filed for Chapter 15 bankruptcy. That’s different from Chapter 11, as Chapter 15 is for foreign companies seeking bankruptcy protection in the U.S. It seems Luckin decided to go this route after settling with the Securities and Exchange Commission (SEC). At that time, Luckin agreed to pay a $180 million fine as part of its efforts to resolve the investigation into Luckin’s accounting fraud.
This brings us to why LKNCY stock is likely going to zero. A big part of the bull thesis had been that Luckin still had nearly a billion dollars of cash from its previous stock offerings. This, in turn, might have allowed Luckin to make a comeback under new management. However, it’s not clear if Luckin still has access to that cash.
Filing bankruptcy, after all, shields a company from creditors, which is usually a move made when financial resources are tapped out rather than when there’s plenty of available cash. To that point, earlier this month, Luckin raised $250 million from private equity to pay for the SEC settlement and fund its ongoing operations. Once again, if Luckin still had access to its purportedly large cash pile, it probably wouldn’t need to raise more money now.
There are a lot of wild theories on social media about LKNCY stock right now, I get that. However, the most likely outcome here is that the company is in bankruptcy because its resources have been depleted, and the reorganization of the company will essentially wipe out current shareholders.
Blink Charging (BLNK)
There’s a major fight in the race to be the leading electric vehicle (EV) charging company. Both ChargePoint (NYSE:CHPT) and Blink have attracted major investor interest. However, it’s not really much of a fair fight.
While ChargePoint looks like a worthy competitor, Blink’s story has at least a few major issues. For example, short sellers have pointed out numerous issues around Blink’s charging technology and the state of its network. Bears contend that Blink’s equipment is dilapidated and not competitive with rivals.
The latest bit of bad news came from an unlikely source. Recently, prominent fund manager David Einhorn discussed a micro-cap company, Hometown International (OTCMKTS:HWIN) which was trading at an incredible $100 million market capitalization. This $100 million is for a single delicatessen in a small New Jersey town. The deli does just $30,000 or so in annual sales. Needless to say, this is an absurd price, and seems like a pump-and-dump scheme of some sort.
CNBC reported that Hometown was helped to go public by the now-disbarred and criminally charged lawyer Gregg Jaclin, who assisted numerous shell companies with paperwork. The OTC blocked Hometown from trading due to concerns about its status. Here’s the thing. Jaclin was involved in a lot of other speculative companies, including Blink.
That just adds to the list of troubling data points around BLNK stock.
Ayro is a classic example of a company that has developed a product in search of a consumer. The company has crafted a nifty light-weight EV. In theory, this is supposed to serve for enclosed areas such as universities and corporate campuses, facilitating transit and cargo delivery in auto-free spaces.
In practice, however, is anyone actually clamoring for what some would call a glorified golf cart?
Last quarter, Ayro reported just $1.6 million in revenues. It lost more than $10 million in the course of bringing in that revenue. Given the company’s relatively thin balance sheet, it will likely need to raise more capital in coming months.
AYRO stock has nearly 20% of the float short, which explains why Reddit stock traders are still interested. However, the fundamental case here is rather lacking.
The EV space has turned out a lot of dubious investments lately. And perhaps there’s no more so than Ideanomics. Short sellers have slammed a lot of companies over the past years. However, as typical as short reports may be at this point, there’s the occasional one that breaks through the noise and makes you pay attention. So it was with Hindenburg Research and IDEX stock last summer.
Hindenburg started off by showing Ideanomics’ failure as an enterprise. As it notes, just since 2015, the company has changed its name three times, been through six different CEOs and CFOs, and had 10 people leave the board. You can forgive one missed idea, however, Ideanomics has failed so quickly and so repeatedly that it’s had change its management team and corporate name on a repeated basis. Just since 2015, the company now called Ideanomics previously was named “You on Demand,” “Wecast,” and then “Seven Stars Cloud” before settling on its current iteration.
After many failed ventures, Ideanomics is now back as an EV company. You might say that’s normal for a penny stock. What came next, however, was crushing. Hindenberg alleged that Ideanomics’ purported new vehicle distribution center didn’t actually exist. Its research found that Ideanomics’ photos of the center were just edited versions of photos found online from years ago of a totally different company. This is a crushing blow to the credibility of a company that has long struggled to generate much in the way of revenues or operational traction.
Koss is another consumer electronics company that got caught in the short squeeze excitement from January. Unlike the infamous video game retailer, however, the short squeeze in Koss made far less sense. Koss was never a particularly huge or culture-defining brand. And, nowadays, Koss is hardly anything to look at.
The company’s revenues are down to $18 million per year; that’s a decline of more than 50% over the past decade. Koss hasn’t generated a meaningful profit since 2016, and tends to run around breakeven or at small operating losses nowadays.
A company with a small and declining revenue base in a commodity business such as headphones and audio accessories isn’t worth much. Indeed, the stock traded for as low as a buck last year and came into 2021 around $3. Thus, the current $20 price seems extreme, to say nothing of the $100 peak it hit during the height of the Reddit stocks short squeeze.
KOSS stock might not go all the way to zero, to be clear. But this was a penny stock before the short squeeze phenomenon broke out, and in all likelihood, it will end up there again in the not too distant future.
And, ultimately, if revenues continue declining as they have in recent years, at some point it would make sense for management to shut down the business entirely instead of continuing to toil on as its prospects keep dimming.
Washington Prime (WPG)
Washington Prime is a real estate trust (REIT) that owns B-tier shopping malls. The company had already been in trouble prior to the pandemic. Shares had fallen from $200 to $30 (on a split-adjusted basis) thanks to decreasing occupancy at the company’s malls along with sharply falling cash flows from operations.
The bulls had been hoping for a redevelopment story. In theory, over time Washington Prime could have converted failing department stores into new types of retail tenant space or even apartments in an attempt to reposition its malls. However, Washington Prime’s balance sheet is a mess, so it didn’t have access to sufficient capital for a full-scale redevelopment agenda. And now, with the pandemic, outside investors have little interest in putting money into second-tier regional malls.
It’s true that not all malls are in trouble. Some luxury properties will come out of Covid-19 in good shape. However, those are generally the top-tier malls, not the sorts of more modest properties that Washington Prime holds. In any case, Washington Prime is now reportedly on the brink of bankruptcy and has sought forbearance from creditors.
WPG stock briefly doubled last month on social media rumors that Washington Prime had managed to avoid bankruptcy. However the rumors were just that; no definitive news actually emerged to justify the Reddit excitement. All told, it still looks Washington Prime will follow its regional mall peer CBL & Associates which declared bankruptcy last year and whose stock was subsequently delisted.
Eastman Kodak (KODK)
I bet you didn’t realize Kodak was still a publicly traded company. That’s right, the former photography titan continues to soldier on. The firm, in its legacy version, did go bankrupt years ago. However, Eastman Kodak emerged from bankruptcy and has tried to find a second life as a slimmed-down operation.
Unfortunately, these efforts have proven distinctly unsuccessful. For awhile, it sought to monetize patents and intellectual property, however that never became a major profit center. Kodak has also tried to pivot into new and emerging technologies. For example, it launched a widely mocked cryptocurrency: the KodakCoin. It was supposed to put photography on the blockchain. However, demand was lacking and the project was shuttered.
Last year, KODK stock jumped once again. This time, it had reached a deal with the Trump Administration to prepare precursors for pharmaceutical drugs. However, the resulting loan agreement was fraught with controversy. With the Trump administration gone, the deal is out of the picture and Kodak is back to its usual floundering self.
Kodak’s valuation remain elevated thanks to high short interest leading to hopes of another short squeeze. But there’s still not much fundamental case for owning the stock.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.