7 Meme Stocks to Avoid So You Don’t Get Caught Holding the Bag

Stocks to sell

While it may seem like “meme-stock mania” is over, several of these names are still up triple digits this year. In fact, much-maligned meme stocks are not losing steam as the more than 10 million members of Reddit’s r/WallStreetBets (WSB) community continue to push shares upward.

However — as is the case with most companies on these kinds of lists — these stocks do not have good fundamentals. And, they have not done well for quite some time now. But Redditors are not joking around. Of the 50 stocks that Robinhood originally put on its restricted list, roughly a third have doubled or more in price in 2021.

For this article, I have curated a list of some of the most sought-after meme stocks and taken a look at their financial performance. Unfortunately, though, meme stocks aren’t governed by a company’s fundamentals. So, it’s altogether better to go ahead and exit your position in these names if you value fundamental strength.

  • Gamestop (NYSE:GME)
  • AMC Entertainment (NYSE:AMC)
  • Naked Brand (NASDAQ:NAKD)
  • Castor Maritime (NASDAQ:CTRM)
  • Sorrento Therapeutics (NASDAQ:SRNE)
  • Canoo (NASDAQ:GOEV)
  • Clover Health (NASDAQ:CLOV)

Meme Stocks to Avoid: Gamestop (GME)

Source: Emil O / Shutterstock.com

Year-to-date (YTD) change: 1122%

Gamestop is one of the original meme stocks. As such, shares of the embattled video-game retailer have become synonymous with the Reddit community. Strings of rocket emojis imply how WSB wants to send GME stock’s price “to the moon.” Likewise, users encourage each other to have “diamond hands,” holding onto the stock until the bitter end and not caving under the pressure.

However, the larger issue with this name is whether GME can turn around its fortunes despite its old-fashioned brick-and-mortar business model. Yes, the company does deserve credit for trying to transform itself into a digital enterprise. But that’s easier said than done. Not to mention, the retailer is up against the likes of Amazon (NASDAQ:AMZN) and Ebay (NASDAQ:EBAY), among others.

If you have money invested in GME stock, I believe it’s time to take profits and invest in other, more stable gaming spaces.

AMC Entertainment (AMC)

Source: QualityHD / Shutterstock.com

Year-to-date (YTD) change: 2586%

AMC was struggling with mounting debt before the pandemic. However, things went into overdrive when the novel coronavirus struck in full force. With Americans under instructions to stay at home for much of 2020, profits and sales plummeted. So, it was not surprising that many analysts felt the next logical step for AMC was Chapter 11.

However, Redditors flew in at the start of 2021 and gave this company a new lease on life. They pumped up the AMC stock price massively — to as high as $72.62 on Jun. 2 — when the movie-theater chain really should have been restructuring. Still, AMC has raised a lot of cash due to its prime meme-stock status. The money raised will go a long way in ensuring AMC can survive and can transform itself.

But the writing is on the wall. When it comes down to it, streaming is the future and you can see that with the outsized returns of stocks like Netflix (NASDAQ:NFLX), Disney (NYSE:DIS) and Amazon. As media and entertainment companies evolve their plans and invest heavily in streaming, what the future holds for movie theaters in America is really anyone’s guess.

Meme Stocks to Avoid: Naked Brand (NAKD)

Source: Shutterstock

Year-to-date (YTD) change: 255%

Until a few months ago, it was a given that Naked Brand would go belly up. Nevertheless, much like several other ailing companies, Reddit changed the equation. As several posts on WSB encouraged users to buy NAKD stock, the share price made an extraordinary recovery. If you ever needed to understand just how powerful the average retail investor has become, look no further than this intimate apparel company.

On a positive note, NAKD is now pursuing a digital transformation, which involves selling off its flagship Bendon brand. Although this is a long-term strategic initiative, however, it won’t help the top line in the interim.

That said, at least the company is making hay while the sun shines. After a recent $50 million at-the-market (ATM) offering of 29.4 million shares, the total count stood close to 476 million. So, Naked has increased its shares greatly in a short span of time. Of course, that kind of dilution is not something stockholders will like. But ultimately, you cannot fault Naked for shoring up reserves. It’s a sensible strategy, considering the company needs funds for its digital ambitions.

Long-term, though, there are several issues with this one’s business model — and they have nothing to do with its cash reserves.

Castor Maritime (CTRM)

Source: Pavel Kapysh / Shutterstock.com

Year-to-date (YTD) change: 1605%

A Reddit-induced short-squeezing frenzy sent Castor Maritime stock to about $2 per share back in early February. This was the first time the global shipping company reached that price point since January 2020. However, CTRM stock has fluctuated quite a bit since that time.

As global trade continues to pick up steam, this international shipping company is poised to take advantage of resurging trade. However, Castor’s fundamentals are hardly something to write home about. The good thing, though, is that CTRM has raised a lot of money to finance future operations and stem the cash burn, building up capacity for an eventual full-scale resumption of global trade.

More specifically, Castor is aggressively buying new vessels to expand its fleet, leading to a substantial increase in the total number of available days for sailing. In total, Castor Maritime has “20 new ships in all, giving the company a fleet of 18 dry bulk carriers and eight fuel tankers” according to The Motley Fool.

Currently, CTRM stock is up over 1600%. But that kind of price appreciation for a company that posted a net loss of roughly $1.8 million in 2020 doesn’t make much sense.

Meme Stocks to Avoid: Sorrento Therapeutics (SRNE)

Source: Shutterstock

Year-to-date (YTD) change: 31%

Sorrento Therapeutics is a biotechnology company that “develops therapies for cancer, autoimmune, inflammatory, viral, and neurodegenerative diseases.” For all intents and purposes, SRNE stock is run-of-the-mill. However, the pandemic has made several unlikely winners.

Sorrento’s price action is volatile and that is because of the PR machinery employed to distribute information regarding its product pipeline — particularly its Covid-19 vaccine.

For example, shares rose about 6% after U.K. regulators cleared a Phase 2 study for Covid-19 nasal drops in newly diagnosed Covid-19 patients. The trial of Covi-Drops will involve approximately 350 outpatients who are either “asymptomatic or have mild symptoms” compared with a placebo.

This is good news and will likely be lapped up by the Reddit crowd. However, it does not consider that most Covid-19 vaccine revenue has already been made — and that will not change shortly. Some very exciting prospects do exist among Sorrento’s core oncology business. But SRNE stock’s future is more so linked to hype.

Canoo (GOEV)

Source: shutterstock.com/rafapress

Year-to-date (YTD) change: -26%

On balance, Canoo is not that bad of a company. However, the startup manufacturer of electric vehicles (EVs) has a different operating model because it applies a subscription model to the EV space. It produces commercial EVs such as vans for vehicle rental and ride-sharing services.

Of course, this idea is pretty novel. But it doesn’t explain why GOEV stock — although down YTD — is up over 40% in a month. That price action is connected to increased interest on Reddit in the electric vehicle stock. Like other meme stocks, GOEV is highly shorted at the moment. Apart from that, there is not much to say about company fundamentals.

Canoo has said it plans to start vehicle production in 2022 and build up to 15,000 units in 2023. So, patience is a virtue if you plan to invest in this one.

Meme Stocks to Avoid: Clover Health (CLOV)

Source: Shutterstock

Year-to-date (YTD) change: -21%

Although it’s down about 21% YTD, “Chamath Palihapitiya-backed” Clover Health is up nearly 78% in the last month. The company — which sells Medicare insurance plans — debuted on the Nasdaq back on Jan. 8. That was about three months after the firm disclosed it was going public in a $3.7 billion deal with Social Capital Hedosophia Holdings III, one of the many special purpose acquisition companies (SPACs) sponsored by Palihapitiya’s Social Capital investment firm.

This name’s proprietary platform can be used “to collect, structure, and analyze health and behavioral data to improve medical outcomes and lower costs for patients.” No doubt, the platform is interesting technology. But it still doesn’t explain why Clover Health now has a market capitalization of $5.42 billion.

So, what’s the main reason this healthcare company has done so well in the past month?  Well, a significant percentage of CLOV stock shares are being shorted by investors who are betting against it.

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On the date of publication, Faizan Farooque 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.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.