Investing in growth stocks can be risky, especially for those migrating into new markets or turnaround ventures. Personally, I’ve experienced losses from such endeavors.
Amid rising interest rates, caution is advised for overpriced growth stocks. Despite recent declines, their valuations remain risky. Two factors contribute to their potential downfall: further interest rate hikes and underwhelming performance. Thus, I think now may be a good time to avoid these three overvalued growth stocks and dodge a bullet.
Mullen Automotive (MULN)
It’s challenging to have confidence in Mullen Automotive (NASDAQ:MULN), a purported auto company with a sub-$100 million market cap and around 12 cents per share. Despite aiming to be an electric vehicle (EV) manufacturer, Mullen struggles to gain traction, evident in its upcoming shareholder meeting proposing a reverse stock split.
Mullen’s focus at the upcoming meeting is on proposal No. 3 – a reverse stock split to meet Nasdaq’s $1 minimum stock price requirement. Despite trading above $1 for 10 days, it’s still noncompliant. Nasdaq’s rules consider factors like price trend and trading volume in this determination.
Mullen, an EV manufacturer with ambitious plans for crossovers, sports cars, trucks, and commercial vehicles, faces bankruptcy risks. Their nationwide EV fleet tour is unlikely to change their downward trajectory. MULN stock, down over 95% this year and rated “F,” signals caution.
Carvana (CVNA)
Carvana (NYSE:CVNA) began the year at $4.63 per share and has surged over 1,000% in 2023 to around $47 per share. However, a recent 15% drop stemmed from a S&P Global Ratings credit downgrade due to a debt restructuring deal.
Moreover, the stock declined after a downgrade by Morgan Stanley’s (NYSE:MS) analyst Adam Jonas from “equal weight” to “underweight.” Despite a raised price target of $35 (20% downside), the consensus target is $39.16.
A credit downgrade is concerning, but a move from CC to D could suggest impending bankruptcy, as debt holders doubt the company’s long-term viability. The market’s response indicates this sentiment. The announcement may raise questions for some investors. While utilizing a soaring stock price for debt restructuring seems beneficial, debt investors’ concerns highlight potential unsustainability in Carvana’s capital structure. S&P Global Ratings warns of underlying issues, serving as an alarm for investors about associated risks. Whether speculators heed this caution remains uncertain.
Novavax (NVAX)
Investors have been rapidly selling popular meme Pharma play Novavax (NASDAQ:NVAX), due to delays in its Covid-19 vaccine launch. The company’s financial concerns were evident as it reported a Q4 2022 net loss of $182 million. Management’s uncertainty about 2023 revenue, linked to U.S. government funding, has also been expressed. Nonetheless, cost reduction efforts and positive vaccine trial results have led to a projected revenue range of $1.4 billion to $1.6 billion for the year.
Despite generating substantial sales from its vaccine candidate Nuvaxovid, the company faced large operating losses in 2021 and 2022, a trend that persists according to recent quarterly results. Despite a significant drop in stock price and a settlement from the Canadian government, caution is advised due to ongoing operational challenges.
While it did receive FDA approval as the fourth approved Covid-19 vaccine, the window of opportunity with the pandemic is over. In 2023 and beyond, the company’s future is uncertain. Thus, it should be no surprise that NVAX stock has become attractive to short sellers. I look at this stock as one that warrants caution rather than intrigue as a potential short squeeze candidate.
On the date of publication, Chris MacDonald 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.