Most meme stocks rallied in 2023. However, the meme stock outlook is grim, given the narrative that 2023 was merely a recovery year for high-beta stocks.
Roundhill’s recent decision to shut down its MEME ETF communicates what I’m trying to get across. The ETF had experienced more than 200% in year-to-date gains when Roundhill decided to close the vehicle. Therefore, suggesting an inflection point in the meme stock arena is near.
The closure could mean one of two things. Firstly, it could be that Roundhill experienced below-target fund flows due to meme investors’ preference for direct investing instead of accessing meme stocks via ETFs. Alternatively, Roundhill’s MEME ETF closure could be due to sluggish expected returns for meme stocks. I’m willing to bet on the latter of the two arguments, as an implied interest rate pivot will cause credit spreads to spike, concurrently diminishing meme stock valuations. Moreover, a technical correction is likely to occur for meme stocks trading above their moving averages.
With the aforementioned in mind, here are three meme stocks to sell.
Carvana (CVNA)
CVNA (NYSE:CVNA) stock surged by more than 10x last year. However, CVNA stock’s Put-Call ratio of 0.95x suggests a retracement is due. In fact, investors already started shorting the stock in December as CVNA’s stock interest grew to an annual high of $1.8 billion.
Mean reversion is salient to the financial markets. However, the phenomenon must be accompanied by economic and company-specific variables to hold validity. In Carvana’s case, we are looking at a company faced with a six-month downward-sloping trend in U.S. vehicle sales. Although Carvana’s historical sales have held up, the demand for durable goods could wane this year as the economy traverses into a trough. Furthermore, Carvana is burdened by a debt-to-capital ratio of 103.24x, placing it in danger if sales had to taper, especially seeing as Carvana’s quick ratio of 0.89x communicates a lack of liquidity on its balance sheet.
Truth be told, CVNA stock’s price-to-sales ratio of 0.89x isn’t bad at all. Nevertheless, we need to put things into perspective. The company faces a challenging macroeconomic outlook and isn’t profitable. As such, CVNA stock is due to revert to a more realistic level in due course.
GameStop (GME)
GameStop’s (NYSE:GME) popularity is no more. GME stock’s average daily trading volume in the past six months was merely 6.17 million, approximately 8.3% of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
A lack of community-driven investing will likely send GME stock into the abyss as its fundamentals are topsy-turvy. GameStop’s organic growth is in tatters as conveyed by its latest sales report revealing lower sales across the board. To break it down for you, GameStop’s collectibles segment suffered 14.1% year-over-year loss while its hardware and software business units slipped by 7.7% and 8.8%, respectively.
GameStop’s C-Suite recently shifted the firm’s corporate strategy by deciding to invest its excess cash into marketable securities instead of buying back its own stock. I agree with the pivot, as slow industry growth is causing an overhang on its stock. In fact, I think GameStop will eventually turn into a growth-by-acquisition company. However, a pivot in that direction will result in costly restructuring charges, concurrently shedding interim value.
Let’s look at matters from a capital markets perspective.
GME stock has a forward price-to-earnings ratio of 159.36x, which cannot be justified as GameStop has a negative 10-year compound annual growth rate of -4.37%. Even though a holistic analysis dictates that other metrics be considered, these figures add substance to my bearish outlook on GME stock.
I would not touch GME stock unless I’m looking for a tax-loss harvest!
BlackBerry (BB)
BlackBerry (NYSE:BB) is the final stock on the list. My rationale for BB stock’s inclusion is quite simple: It has a poor fundamental outlook, uninviting valuation multiples, and a cumbersome pathway toward recovery.
A material event unfolded last month as BlackBerry released its quarterly outlook. BlackBerry’s revenue is due to settle between $150 million and $159 million, 15% below analysts’ expectations. Despite beating its third-quarter earnings-per-share target by three cents, BlackBerry’s lower sales forecast could relay into its bottom line, contemporaneously crushing shareholder value.
Furthermore, BlackBerry is on a disposition spree as it seeks to free up capital for new growth ventures. According to Canaccord Genuity, such dispositions can allow new growth avenues. Nevertheless, BlackBerry’s existing growth initiatives in cybersecurity are yet to receive the forecasted traction. As such, there is insufficient evidence to conclude that BlackBerry is set to recover from its disappointing 5-year compound annual growth rate of -1.18%.
As previously mentioned, BB stock’s price multiples are lacking. For example, BB stock’s price-to-sales ratio of 2.55x is high, considering the company’s negative growth rate. Additionally, BlackBerry’s forward P/E ratio of 56.20x is poorly placed, proving that better cybersecurity plays exist.
On the date of publication, Steve Booyens did not hold (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.
