While successful stock investing can help you achieve financial independence and build lasting wealth, there are also stocks that can cause your portfolio to sink into the gutter.
Recently, a handful of stocks have stood out as risking the latter, despite having their prices run up far beyond what the underlying businesses justify.
Here are three stocks to stay away from in our view:
Magic Empire Global
Magic Empire Global (NASDAQ:MEGL) is an investment bank that recently went through an IPO, pricing its initial offering at $4 per share.
Driven by rampant retail investor enthusiasm, the stock quickly took off, reaching a high of nearly $250, despite only earning a bit over $200,000 last year. As quickly as it rose, the stock fell back to earth, leaving investors who bought in at the peak sitting on huge losses.
Even after falling back under $20, though, Magic Empire Global seems woefully overpriced. The company’s market capitalization stands at $164.4 million, more than 70 times its 2021 revenues and 800 times its earnings for that year.
It’s also worth noting that the company’s revenues fell last year, making the massive spike even more difficult to justify.
Magic Empire Global is almost certainly too risky for most investors’ portfolios. The stock’s wild volatility has already cost many retail investors the vast majority of the capital they put into the company. At its current valuation, the stock trades at multiples that are in no way tied to business performance.
Because it is so new to public trading, Magic Empire does not yet have any 12-month analyst forecasts. However, the stock is still trading at more than four times the price of an IPO that occurred less than a month ago.
Even if it returned to the $4 mark, the massive price fluctuations Magic Empire has undergone and its value compared to earnings should give investors pause.
Overall, Magic Empire is a stock to avoid until it has settled down and established a track record of earnings that investors can use to appropriately value the business.
Redbox Entertainment (Chicken Soup for the Soul Entertainment)
Unlike Magic Empire, Redbox Entertainment is a well-known consumer brand in the United States. The company’s signature red kiosks can be found throughout the country, allowing consumers to rent popular movies on physical discs.
Last week, the company was purchased by Chicken Soup for the Soul Entertainment (NASDAQ:CSSE), giving Redbox shareholders just $1.28 per share.
Even the larger umbrella that is Chicken Soup for the Soul Entertainment would be a hard buy, though not as difficult as Redbox was on its own.
The company does have a median analyst target price 93.3 percent above its current trading price, indicating at the least the potential for huge upside. Analysts also expect the company to achieve profitability in 2024.
However, this would require average growth of nearly 70 percent over the next two years. Unless CSSE can achieve this outsized growth rate, it seems difficult to imagine the stock shooting up as expected.
Chicken Soup for the Soul also reported much larger losses than expected in the most recent quarter. The company’s losses equated to $1.23 per share, compared to just $0.74 expected by analysts.
This loss sent the stock tumbling and further decreased the chances of the company achieving massive returns this year. CSSE’s projections regarding the value of Redbox also seem overly optimistic. The combined company expects revenue to triple in the coming year.
Ultimately, CSSE is a better investment than Redbox was on its own. The fundamentals of the business, however, don’t look particularly attractive in a market where there are likely much better deals to be found.
It’s also worth noting that Redbox had been the target of heavy meme-stock trading activity in the weeks prior to CSSE’s acquisition.
As the new owner of Redbox, it’s at least possible that CSSE will eventually be subject to the same forces. While the parent company could become a reasonable investment at some point, it doesn’t seem like a good stock to add to your portfolio at the moment.
A final stock for investors to avoid at all costs is AMTD Digital (NYSE:HKD). This stock closely mirrors the case of Magic Empire, but is even more extreme.
AMTD is a Hong Kong financial services company that was picked up by overly enthusiastic retail investors, causing its price to rise and fall wildly. The stock ran from its recent IPO price of just $7.80 to a high of $2,555.30. At its height, AMTD Digital briefly commanded a market capitalization larger than that of Goldman Sachs.
AMTD’s valuation was even more difficult to believe in light of its relatively small revenues. In the year ending in April of 2021, the finance company brought in only about $25 million in revenue.
Like Magic Empire, AMTD appears to have been the target of a meme trader buying frenzy, sending its price beyond all reasonable ties to the value of the underlying business.
At the time of this writing, AMTD still trades at $192.50 and likely has a great deal of room left to fall. This stock could easily lose 90 percent or more of its current value as retail investors exit their positions. At this point, investors should stay away from AMTD Digital for the foreseeable future.
The combination of AMTD Digital and Magic Empire also points to a troubling return of meme investing. Both of these stocks are recent IPOs that offer financial services in the Hong Kong market.
This year, a total of seven IPOs from Hong Kong and China have seen massive price fluctuations associated with retail investors after their initial listings.
This kind of extreme momentum investing has a bad habit of distorting prices and distracting investors from business fundamentals. As such, it’s important for all investors to ensure that they are avoiding irrational exuberance and making their buying decisions using sound, time-tested investment principles.
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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.