Hot garbage.
That’s what a 17-year-old Garrett would call terrible music in the 1990s.
Fast forward nearly 25 years, and I still use that term.
Only this Garrett understands economics, likes some of that 1990s music and can handle complex valuations in the financial markets. So in Friday’s issue, I want to tell you about the “hot garbage” still publicly trading.
After 14 years of cheap money from the Federal Reserve, a system of wild speculation that eliminated fundamentals, and a comical system of meme stocks and cryptocurrency speculation… it’s time to bring back the term.
So here are the hot garbage stocks to avoid in 2023.
Now Hold Up — Define “Hot Garbage”
Okay, okay. People should understand how we’re defining these terrible, no-good, worthless companies. First, I want to know that they’re unprofitable. So, a simple screen of negative price-to-earnings (P/E) ratio will give us the first clue.
Second, I want a comical valuation. For this, I’ll use a price-to-sales (P/S) ratio well into the double digits.
Third, I want to see that the balance sheet is a wreck. So I’ll look at a Piotroski Score under 3, and I’ll look for a company with a Z Score (bankruptcy risk) under 1.5.
I also want to see a deterioration in credit standards and a weakening balance sheet.
From there, I’ll add my secret sauce — an additional valuation metric that suggests this stock has no chance of support from the private equity sector or other private investors.
Again:
- P/E Ratio: Negative
- P/S Ratio: Over 10 (Even 20)
- F Score: 3 or Less
- Z Score: 1.5 or Less
In addition, I made sure that these stocks are U.S. based and have options chains available. At these levels, the stocks can’t justify their prices over the long term. Let’s dive in.
Hot Garbage Stock No. 1: Virgin Galactic Holdings Inc. (NYSE: SPCE)
Sir Richard Branson made a lot of money on his Virgin brand. And plenty of other executives sold SPCE stock over the last five years.
Since 2017, executives have sold $1.6 billion in SPEC stock. They’ve only bought about $100 million in that time. That’s a lot of money exiting a company at the executive level.
Virgin Galactic is in the business of space tourism. But the stock continues to crater from its all-time highs. In 2021, shares popped above $55 per share. Today shares trade for under $5.
There’s a reason for this… The company’s numbers are terrible! Virgin Galactic has an F score of 2, a negative Z score, and a P/S ratio of over 769 times.
To justify its price today, the company would need to provide 100% of revenue to investors for the next seven and a half centuries. You’ll probably walk on the moon before you can justify owning this stock ever again.
Hot Garbage Stock No. 2: Nikola Corp. (Nasdaq: NKLA)
Well, here’s another junk stock in Nikola — a so-called Tesla-killing electric vehicle company. It showed so much promise in 2020 and 2021 that investors piled into the narrative around its investment potential. Of course, we all know that the narrative was too good to be true…
Company Founder Trevor Milton was found guilty in October of fraud — he artificially pumped up his stock and engaged in wire fraud. He’ll be sentenced for up to 25 years in prison in January.
Insiders haven’t waited for the sentence for the selloff… They’ve been dumping stock all year. In the last five years, insiders have dumped nearly $450 million in NKLA stock, compared to buying just $68.7 million. That’s not a good ratio, and it shouldn’t inspire confidence that people with “skin in the game” have headed for the exits.
Nikola’s stock looks like a company heading toward delisting and ultimately, bankruptcy. Its balance sheet is a mess, with an F score of 2 and a Z score of negative 2.77%. The price-to-sales ratio is now at 22.4x.
Under no circumstance would I buy this stock. It might be fun to trade around momentum, but it’s likely heading toward the bankruptcy courts one day.
Garbage Stock No. 3: Odyssey Marine Exploration Inc. (Nasdaq: OMEX)
What if I told you that there was a company with the insane economic moonshot of Virgin Galactic combined with the financial instability of Nikola?
Look no further than Odyssey Marine Exploration. Why go to space when you can explore the cold-dark lunar feel of the ocean’s bottom? And with this stock, your money is also likely heading to Davy Jones’ locker.
The company operates in deep-sea exploration, focusing on the procurement of minerals under the oceans. This company started in the exploration business of shipwrecks, but then it found a great narrative for a public market with no ability to control reckless speculation.
OMEX has an F score of 3 and a Z score of negative 35.7. Simply put, this company is a creditor away from a serious problem.
To your wealth,
Garrett
P.S. And don’t forget to let me know if you have any feedback, questions about today’s issue or anything else. Just email us at hubfeedback@wealthpress.com.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
