3 Overvalued Reddit Stocks to Avoid This Month
Following the GameStop short squeeze earlier this year, the Reddit forum WallStreetBets (WSB) has become immensely popular. While WSB’s huge bets agai...
Following the GameStop short squeeze earlier this year, the Reddit forum WallStreetBets (WSB) has become immensely popular. While WSB’s huge bets against short sellers and consequent short squeezes have helped many stocks skyrocket in price, it has also resulted in high valuations for several fundamentally weak stocks. So, we believe overvalued Reddit stocks Upstart Holdings (UPST), Clover Health Investments (CLOV), and Root Inc. (ROOT), each with bleak growth prospects, are best avoided now. Read on.
The subreddit WallStreetBets (WSB) gained immense popularity following the GameStop Corporation (GME) short squeeze it drove in January. WSB has targeted many other fundamentally weak stocks that possess high short interest and benefited retail investors by causing short squeezes in them.
However, the resurgence of coronavirus infections has raised concerns over the economy's faltering recovery and overshadowed the optimism about the Federal Reserve’s possible continuation of its accommodative policy. Hence, fundamentally weak and overvalued stocks that surged in price over the past few months, driven solely by social-media hype, could witness a significant pullback in the near term.
Therefore, we believe the shaky fundamentals and excessively stretched valuations of Reddit stocks Upstart Holdings, Inc. (UPST), Clover Health Investments Corp. (CLOV), and Root Inc. (ROOT) could potentially cause their share prices to retreat in the near term. So, they are best avoided now.
Upstart Holdings, Inc. (UPST)
UPST in San Mateo, Calif., operates a cloud-based artificial intelligence lending platform. The platform gathers customer demand for loans and connects it to its network of AI-enabled bank partners. In addition, the company connects individuals, banks, and institutional investors via a common AI lending platform.
Last month, UPST priced $575 million of Convertible Senior Notes, due 2026. The company intends to use approximately $50.9 million of the net proceeds from the notes offering to pay the cost of the capped call transactions.
UPST’s operating expenses increased 448.5% year-over-year to $157.65 million in the second quarter ended June 30, 2021. Its other income stood at $15,000 for the quarter, compared to $5.3 million in the prior-year period. The company’s net cash used in investing activities came in at $39.70 million for the six months ended June 30, 2021.
In terms of forward Price/Sales, UPST is currently trading at 28.58x, which is 796.4% higher than the 3.19x industry average. Also, in terms of its forward EV/Sales, the stock is currently trading at 27.92x, which is 819.7% higher than the 3.04x industry average.
UPST’s POWR ratings are consistent with this bleak outlook. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
UPST has rated an F grade for Stability, and a D for Value. In addition, within the D-rated Financial Services (Enterprise) industry, it is ranked #51 of 106 stocks.
To see additional POWR Ratings for Growth, Sentiment, Quality, and Momentum for UPST, click here.
Clover Health Investments Corp. (CLOV)
CLOV is a Medicare advantage insurer based in Franklin, Tenn. The company offers preferred provider organization and health maintenance organization health plans for Medicare-eligible consumers through its software platform.
Last month, the international securities and consumer rights litigation company Scott+Scott Attorneys at Law LLP commenced an investigation into whether some directors and executives of Clover Health Investments, Corp. violated their fiduciary obligations to SCH III and its shareholders. This could negatively impact CLOV’s stock price in the near term.
For the second quarter, ended June 30, 2021, CLOV’s operating expenses increased 299.1% year-over-year to $594.33 million. Its operating loss came in at $181.86 million, versus a $23.17 million operating profit in the prior-year period. Its net loss amounted to $317.61 million, compared to a net income of $5.40 million in the second quarter of 2020. The company reported a negative adjusted EBITDA of $138.72 million, compared to a $24.79 million adjusted EBITDA in the year-ago quarter.
The company's EPS is expected to remain negative in the current year. CLOV's stock has declined 40.1% in price over the past three months. In terms of trailing-12- months Price/Book, CLOV is trading at 11.28x, which is 197.5% higher than the 3.79x industry average.
CLOV’s weak fundamentals are reflected in its POWR ratings. The stock has an overall F rating, which equates to Strong Sell in our POWR Ratings system. The stock also has an F grade for Value, Sentiment, and Stability. In the B-rated Medical – Health Insurance industry, it is ranked last of the 11 stocks.
In addition to the POWR Ratings grades I have just highlighted, you can see the CLOV rating for Momentum, Quality, and Growth here.
Root Inc. (ROOT)
ROOT offers insurance products and services, including vehicle, house, and renters’ insurance in the United States. The Columbus, Ohio-based company has a direct-to-consumer strategy and serves clients primarily through mobile applications and its website. In addition, its direct distribution channels cover digital, media, referral channels, and distribution partners.
During the second quarter, ended June 30, 2021, ROOT’s revenue declined 26% year-over-year to $89.8 million. The company’s operating loss grew 451.6% from its year-ago value to $172.1 million, while its net loss surged 359.1% from the prior-year quarter to $178.6 million. The company’s loss per share came in at $0.72 over this period.
Analysts expect its EPS to remain negative in its fiscal year 2021. In addition, ROOT’s revenue is expected to decline 56.8% year-over-year to $266.6 million in the current year. The stock has declined 46.7% in price over the past three months and 59.2% year-to-date.
Currently, ROOT looks extremely overvalued. In terms of forward Price/Book, ROOT’s 2.74x is 146.5% higher than the 1.11x industry average. In addition, its 5.96x forward Price/Sales is 87.1% higher than the 3.19x industry average.
ROOT’s poor prospects are also apparent in its POWR Ratings. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system.
It also has an F grade for Value and Sentiment, and a D for Growth and Stability. ROOT is ranked #55 of 56 stocks in the C-rated Insurance – Property & Casualty industry.
Click here to see the additional POWR Ratings for ROOT (Quality and Momentum).
UPST shares were trading at $276.82 per share on Monday morning, up $6.36 (+2.35%). Year-to-date, UPST has gained 579.31%, versus a 20.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.