At the onset of the pandemic, I was extremely worried that we were facing a catastrophic paradigm shift. Frankly, I wouldn’t have dreamed of touching growth stocks to buy. Of course, those who dared to buy into the doldrums of 2020 made out with unbelievable profits. Soon, the masses followed, with seemingly everyone piling into the more speculative names of the equities sector.
In hindsight, the logic made perfect contrarian sense. Sure, the disastrous novel coronavirus dramatically changed the economic landscape. And it’s possible that certain elements will be forever marred because of the public health crisis. At the same time, the governmental response — lockdowns, unemployment benefits and stimulus checks come to mind — gave millions of Americans time and money. This later translated to enormous sentiment toward growth stocks.
But it’s fair to ponder whether this phenomenon can last. While I don’t mean to be a killjoy, I think investors ought to consider the possibility that many of the popular growth stocks over the trailing year are getting extremely stretched. Primarily, I’m worried about stock trading on margin. I’m a broken record on this issue, but the metric is hitting record highs after record highs.
In all likelihood, this type of speculation won’t last. There’s the constantly cited argument that the only reason the economic recovery appears so robust is that the Federal Reserve has kept benchmark interest rates artificially low. But since rates have generally been falling for nearly 40 years, you’ve got to wonder if we’ve already hit the bottom. If so, higher rates would not be so conducive for growth stocks.
While there’s ample debate about that point, low rates should spur borrowing and risk-taking in the economy. Higher rates would likely have the opposite effect, which may put a chill on the current recovery narrative. Therefore, it makes sense to adopt a cautionary posture on these popular growth stocks:
- Carvana (NYSE:CVNA)
- DraftKings (NASDAQ:DKNG)
- Palantir Technologies (NYSE:PLTR)
- Blink Charging (NASDAQ:BLNK)
- Harley-Davidson (NYSE:HOG)
- Nielsen Holdings (NYSE:NLSN)
- Ebang International (NASDAQ:EBON)
Before we explore the names above, I want to be clear that I’m not talking about shorting these growth stocks. Instead, consider this article to be a “check engine light.” You don’t necessarily need to open your wallet for an expensive repair. But you should at least be aware that there might be a problem; that way, you don’t recklessly stress your car.
Growth Stocks: Carvana (CVNA)
Speaking of check engine lights, let’s talk about used cars. Prior to the pandemic, Carvana had a clear fundamental catalyst: it offered an easier and more convenient way to purchase used vehicles. Also, there was a demographic tailwind: millennials simply don’t want to haggle for car purchases to the same degree as prior generations.
Factor in the pandemic and its impact on the global supply chain and you had one of the best and most incredibly contrarian growth stocks to buy. While I don’t have time to go into every detail that boosted CVNA stock, with automakers cutting production and the semiconductor disruption and you see skyrocketing demand for used cars, particularly SUVs.
Also, you had people buying cars for the first time to avoid taking public transportation. These are powerful catalysts but they’re likely not sustainable. As we head slowly toward a more normal situation, CVNA risks incurring a steep correction.
You should expect that the used-car market will enter peak valuation soon. With stimulus checks having been spent and broader consumer euphoria gradually fading, CVNA if anything likely has limited upside potential.
On the surface, DraftKings appears like one of the top growth stocks to buy, especially in light of its tempting discount from this year’s highs. More importantly, the normalization of society means the full return of sports. From our American classics of football, basketball and baseball to international sports like the ongoing and resumed Euro 2020 tournament, this should represent fertile ground for DKNG stock.
But then, you’ve got to question why DraftKings shares are offering a sizable discount in the first place. After all, for the underlying company’s first quarter of 2021 earnings report, it rang up $312 million, a year-over-year increase of 175%.
However, Q1 2020 is hardly representative of DraftKings’ growth potential. Further, I think some investors were worried about the sequential decline in revenue between Q4 2020 and Q1 2021. If anything, enthusiasm for sporting-related ventures should increase as the Covid-19 crisis fades into the mirror.
Ultimately, astute investors may be paying attention to the online/mobile sports betting sector’s legislative backdrop in the U.S. Reading the tea leaves of gambling politics, it seems unlikely for California and Texas to adopt online/mobile sports betting.
The problem? Those two states alone represent over 23% of the national GDP.
Growth Stocks: Palantir Technologies (PLTR)
On the surface, Palantir Technologies may be a software and data analytics solutions provider. But do some digging — actually, only a little is required — and you’ll quickly find that Palantir is one of the market’s most controversial growth stocks.
To be fair, Palantir passionately forwards its contributions to society: fighting drug cartels, bringing child predators to justice and preventing terror attacks. At the same time, BBC notes worrying aspects of its business:
“But while Palantir might like to highlight the lives it helps save, it has also been accused of having ‘blood on its hands’ by civil rights protesters. They object to its tech being used to identify places where illegal immigrants are working so the properties can be raided and those arrested deported.”
Will these factors cause a headwind for PLTR stock? I don’t see how you can ignore the possibility that it might. Remember, millions of people invest in electric vehicle-based growth stocks because they know young people care about environmental and social responsibility. So, Palantir’s alleged shady side contradicts the core ethos of millennial investors.
Finally, there’s a chance that Palantir’s platform is underwhelming, a feedback provided by intelligence analysts, according to a New York Times report.
Blink Charging (BLNK)
Inarguably, one of the hottest segments among growth stocks is EVs. Promising to radically change the paradigm of automotive transportation, an increasing number of consumers have taken the plunge. Percentage-wise, the growth rate in the EV sector is phenomenal.
In addition, climate change has rapidly caught the mainstream attention. While I understand that debate about this topic rages across chatrooms and dinner tables, the reality is that many parts of our country face severe risks. Even the governor of Utah not too long ago requested residents of his state to participate in a weekend of prayer for rainwater to ameliorate a record draught.
I’m not one to criticize an individual’s spiritual beliefs. But at the same time, we can’t let our beliefs get in the way of real tangible solutions.
Building out EV infrastructure seems like a no-brainer, which is why Blink Charging has enjoyed remarkable success over the trailing year. And since you’re dealing with infrastructure and not guessing on which EV brand will dominate, BLNK stock seemed very reasonable — at a certain price.
We may have exceeded that threshold. Moving forward, the challenge I see is the onerous prices of EVs relative to similarly featured combustion cars. If the economy weakens, that would be a major challenge.
Growth Stocks: Harley-Davidson (HOG)
While watching an episode of Jay Leno’s Garage — the former talk show host’s YouTube channel — Leno made an excellent point about EVs (of which he has long been a proponent) that I believe applies to the narrative (or lack thereof) for Harley-Davidson.
What he appreciated about EVs is that they’re sporty, quick and silent (relatively speaking, of course). Moreover, Leno stated that while he will always appreciate the machinery and artistry of combustion-based exotic cars, he doesn’t necessarily need to hear every loud, revving engine outside while he’s having lunch.
I can appreciate that because I think Leno speaks to the shifting behaviors in mobility culture. Unfortunately, this puts Harley-Davidson in a bind. Yes, there are some people — even among millennials and Generation Z — that love big bruising motorcycles. But if you could ask the late Sen. John McCain, he would probably tell you that there are just not enough of them.
Sure, Harley-Davidson brought in $1.42 billion of revenue in Q1 2021, up nearly 10% YOY. But again, that’s a rough comparison. A better contextual view is Q1 sales from 2017 and 2018, both of which were above $1.5 billion.
Sadly, like other growth stocks tied to a fading culture, the demographics are just not there for HOG stock.
Nielsen Holdings (NLSN)
One of the benchmark institutions for analytics on audience size and composition for content programming, Nielsen Holdings is one of the most relevant growth stocks you can buy — if you’re permanently stuck in 1992.
Back then in the glory days of analog technology, everybody in media lived and breathed by Nielsen ratings. How could you not? If the numbers backed up your broadcast content, you could depend on a re-up. If not, there’s the door.
In a sick twist of fate, it’s Nielsen that’s about to find itself out of a job. You see, when you’re in the modern world, people don’t buy subscriptions to TV Guide to find out what’s good on TV. And part of that is because people don’t watch TV anymore; they’d rather stream their favorite shows on services such as Netflix (NASDAQ:NFLX).
True, sports events and cable news offer some relevance for Nielsen’s core business. But gradually, the TV market is facing severe disruption from on-demand digital alternatives. Its only hope is to somehow make a pivot to digital, but that would be difficult since streaming companies already have access to their data, along with myriad analytics options.
If you profited handsomely from its post-Covid-19 bump, you might want to think about taking some off the table.
Growth Stocks: Ebang International (EBON)
Due to the intense interest in cryptocurrency-related ventures, Ebang International likely has a strong following. So I just hope that you’ll bear with me (no pun intended). I think cryptocurrency mining businesses are intriguing because digital assets will probably be relevant for many years to come. But I just don’t think that right now is the time to buy EBON stock.
Yes, the application-specific integrated circuit (ASIC) chip design company is already trading at a huge discount relative to its highs. But I would argue that this is for a reason. First, there’s very negative sentiment in the underlying crypto space, which will impose difficulties for EBON stock should the sector remain volatile. It’s going to be difficult to motivate miners when the rewards are so deflated.
Second, mining-specific headwinds threaten to hurt growth stocks levered to the broader crypto industry. While I get that Ebang released a statement saying that China’s crackdown on mining operations has no direct impact to the company, mining operations face other threats.
The prodigious use of energy along with, in some cases, water to cool down mining equipment will be a socially and politically divisive issue. This is not an inviting proposition in light of the crypto market’s volatility.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.