The meme stocks are back, but should you get involved? This group of stocks shouldn’t be too quickly dismissed. Investors can find some gems for their portfolios. However, many of these stocks continue to have troubled business models. That’s the common thread when identifying meme stocks to sell.
Meme stocks were made popular by the sub-Reddit group WallStreetBets. This group is known for having members willing to take big swings on stocks that have a high risk-reward potential.
The attraction of meme stocks is not in a company’s fundamentals. Rather, retail investors in these stocks hope to take advantage of high short interest that can cause a short squeeze. This occurs when many investors are short selling a stock and the stock’s price moves higher, it forces short sellers to buy the stock at the higher price to cut their losses. This, in turn, pushes the stock higher which causes more short sellers to exit.
However, the existence of high short interest by itself doesn’t ensure a short squeeze. And one characteristic of these meme stocks to sell is that they didn’t get a boost from the recent meme stock rally.
Beyond Meat (BYND)
If you simply look at short interest, you can understand why Beyond Meat (NASDAQ:BYND) would be thought of as a candidate for a short squeeze. Short interest on BYND stock is 39.85 and it has a 9.8 short interest ratio. The short interest ratio measures how many days short sellers will need on average to cover their positions by borrowing all their borrowed shares.
But where will the buyers come from? The problem is two-fold. When Beyond Meat came on the scene, it was the only game in town. That meant in addition to having to educate consumers it had to overcome a price premium of about 67%. A recent survey from the Good Food Institute shows the price premium has come down, but it’s not at parity. And the same survey showed that the primary reason consumers avoid plant-based meat is they don’t like the taste.
In the meantime, revenue is falling year-over-year that leaves little hope for the company turning a profit which is something it hasn’t done since it went public.
BlackBerry (BB)
Meme stock fans have been aware of the BlackBerry (NYSE:BB) pivot. Others, like yours truly, were not even aware the company was still publicly trading until I came across them a couple of years ago.
At that time, the company was in the final stages of selling off the patents for its legacy mobile devices. Today, it’s a cybersecurity/software company with a little bit of automotive semiconductor/sensor technology mixed in.
The common thread is that the company faces significant competition in each of these areas. It may be able to carve out a niche, but it’s hard to see that becoming something for investors to get excited about.
The company has managed to post a profit in the last two quarters. That’s been due to aggressive cost-cutting measures. However, addition by subtraction only gets you so far. If nostalgia is your thing, BB stock is one to root for, but with the stock down 21% in a month when meme stocks went crazy should tell you why BlackBerry belongs on a list of meme stocks to sell.
Peloton (PTON)
Peloton (NASDAQ:PTON) is a good reminder that a product and a stock are not the same. By many accounts, the company makes quality exercise equipment. And savvy investors who jumped on PTON stock in early 2020 got a big payoff. However, those investors took profits a long time ago.
What investors face now is a company that has a large and stable customer base, but not necessarily a growing one. The company is posting year-over-year declines on the top line and has over $1.6 billion in long-term debt. In fairness, the company has restructured some of that debt so much of it doesn’t mature until 2029. However, Peloton is on track to deliver negative free cash flow of $60 million for fiscal year 2024. With the company running remaining unprofitable, that’s tough math for investors.
Short interest in PTON stock is around 18.5% and has increased 52% in the last month. Not surprisingly, the stock is down 3.3% in that time. There may be an opportunity for investors inclined to short the stock, but it’s hard to see long-term upside with this meme stock.
On the date of publication, Chris Markoch 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.