A great way to play contrarian is by selling or shorting stocks that are perpetually bleeding and have little chance of making a recovery. There are many companies like Bed Bath & Beyond (OTCMKTS:BBBYQ) that are delaying their inevitable bankruptcy through share dilution and betting against these stocks can be extremely profitable if you choose the right ones. Some stocks you should never buy — and we’ll be discussing three such stocks today.
However, I would note that if you want to go short, I will remain very cautious. It can be dangerous to short volatile stocks, even if it’s a falling knife. Short squeezes are rare, but they are trendy nowadays and can lead to substantial losses if you are caught up in the wrong place at the wrong time.
With that in mind, let’s explore the three stocks to never buy:
IronNet (NYSE:IRNT) is a cybersecurity company specializing in a collective defense model where customers can share and analyze cybersecurity threats. However, this company is on life support as customers leave the platform and choose better competitors like Darktrace (OTCMKTS:DRKTF), Vectra and LogRhythm.
IronNet’s sales are expected to continue falling to $25.3 million next year from its current $27.26 million. It doesn’t seem that bad, but considering it burned $17 million in its last reported quarter alone and $110 million for the last four, this should be a strong no-no for any rational investor. The future is grim here, as it only has $34 million in assets and relies on share dilution to run the business. With such losses, that too will run out soon since the company’s market capitalization has dropped below $20 million.
I’m confident that unless a much larger company comes to the rescue or acquires it for a much lower price, IronNet will be filing for bankruptcy soon.
Sure, I do agree that there is a catalyst where C5 Capital could proceed with last year’s proposed transaction to acquire IRNT shares for 30 cents each. However, that is getting increasingly unlikely six months into 2023, where the share price is hovering at 18 cents each and declining. Bankruptcy seems to be the only way out.
Lordstown Motors (RIDE)
Lordstown Motors (NASDAQ:RIDE) is another company doused in red ink. Down 82% year-to-date, the company tried to keep its head above water through a 1:15 reverse stock split. Regardless, you can’t dilute shares forever and I expect a near-term bankruptcy for Lordstown Motors very soon. The market capitalization here is below $50 million, while this company burned through $171 million last quarter. Sales are nonexistent.
Meanwhile, the company is suing Foxconn as a last-ditch attempt. Foxconn made a wise decision and backed out of purchasing 10% of RIDE. Even If Lordstown was successful, I don’t think they would have enough cash to survive for the next two quarters.
Thus, this is a strong sell in my book and is among the stocks to never buy.
Arrival (NASDAQ:ARVL) is another electric vehicle manufacturer on its last legs. The company’s 1:50 reverse in April provided some breathing room, but I don’t see it surviving in the long run with its current financials. Arrival does have plans to merge with the blank check company Kensington Capital Acquisition. However, even if the merger goes smoothly and it gets access to $283 million in fresh cash, the company still burns through some $40 million per quarter with no sales. The merger’s success is unlikely, but let’s go through with this optimistic best-case scenario.
After this special purpose acquisition company (SPAC), ARVL shareholders would own only 12.7% of the company after dilution. You’d likely have to wait years or more to profit from the current entry point. Again, that’s the best that can happen here. The merger’s potential success wouldn’t change Arrival’s issues with competition, production, and revenue generation in the next few years. Significant long-term share dilution is also inevitable.
As for the worst-case scenario, Arrival could be filing for bankruptcy in the next few quarters.
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On the date of publication, Omor Ibne Ehsan 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.