Generally speaking, there are lots of good reasons to consider investing in growth stocks right now. The primary factor is the expectation of rate cuts at some point this year. The European Central Bank just initiated rate cuts that pushed European growth shares higher. The same is bound to happen stateside at some point, which is why growth stocks are appealing.
That said, not all growth stocks are created equal. Some growth stocks simply benefit from irrational exuberance that is bound to dissipate. Those are exactly the kinds of companies investors must avoid.
The recent resurgence of meme stocks is responsible for some of the irrational exuberance at the moment. It isn’t the only factor.
GameStop (GME)
Investing in GameStop (NYSE:GME) stock is a surefire way to get burned. Surely there are hundreds and thousands of individual investors who have individual anecdotes of great success they’ve achieved by investing in GameStop.
Keith Gill, also known as Roaring Kitty on social media, is the most obvious example. However, his massive success may not even result in any appreciable gains since he is at risk of being charged with market manipulation.
It’s almost impossible to predict what will happen with GameStop stock at this point. Influencers like Gill clearly can send share prices higher but that means little to the average retail investor who has nowhere near that level of influence. All you and I can say is that from a fundamental perspective, GameStop is not attractive.
The company just released earnings which showed that revenues continue to fall and the company continues to produce losses. Fundamentally speaking, there’s no reason to believe in the stock. GameStop is going to continue to move wildly until June 21 when Roaring Kitty’s options expire so ride that roller coaster if you please but many are going to get burned.
Robinhood Markets (HOOD)
There’s no logical way to argue that Robinhood Markets (NASDAQ:HOOD) isn’t an attractive growth stock overall. Year-to-date returns above 80% speak for themselves. The company also recently posted record revenues of $618 million at the beginning of May. Furthermore, the company is profitable at the net income level, reporting $157 million in earnings during the first quarter.
Yet I can’t help but feel Robinhood is due for a correction sooner or later. It continues to be wildly overpriced relative to its competitors. The company’s success could soon be its undoing. Part of the reason that Robinhood is popular is its crypto unit. Yet the Securities & Exchange Commission is pursuing Robinhood and is likely to sue the company in the near future.
Beyond that, can its biggest proponents even trust Robinhood? There are reports traders have been blocked from purchasing and selling GameStop shares in the most recent frenzy.
It’s my experience that companies that fly high and suffer from such allegations often fall dramatically.
Lucid Holdings (LCID)
Not long ago, Lucid Holdings (NASDAQ:LCID) was one of the most hyped electric vehicle (EV) stocks. These days there’s much less excitement surrounding its shares but it is still a growth target for investors.
Those investors are awaiting rate cuts and any other potential catalysts that could revive the EV market overall.
Yet, there is little reason to believe in Lucid at this point. The company is losing piles of money and its revenues aren’t growing quickly. Lucid is nowhere near making money from sales of its flagship Air series sedans.
Despite that, the company has plans to launch an SUV later this year. The company is absorbing the massive costs associated with manufacturing a completely new vehicle while remaining extremely unprofitable. The result will be the company reporting drastically larger losses once it initiates sales of that SUV. Lucid will likely need to fire more employees while simultaneously hoping it can magically produce a completely new SUV. And somehow business fundamentals are supposed to improve. None of it adds up and LCID stock will fall because of it.
On the date of publication, Alex Sirois 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.