Stocks to sell

Quantumscape (NYSE:QS) shares have been on a tear since the start of the year, but that may be starting to end. After briefly re-hitting double-digit prices on Feb. 2, QS stock has experienced a pullback, falling down to the high single-digits.

This may only seem like a modest drop for shares in this early-stage electric vehicle battery technology company, but make no mistake: QS offers investors a high amount of downside risk, with upside potential best described as questionable.

The reasons for the stock’s big breakout in price are temporary as nature. Pretty soon, Quantumscape’s fundamentals will come back into focus. That’s bad news for anyone “buying the dip” today.

Given the company’s poor financial state and the high likelihood that its fiscal troubles will accelerate, this stock could give back its recent gains and then some. Let’s dive in, and see why it’s still wise to steer clear.

QS Quantumscape $9.27

QS Stock and the 2 Fading Factors Behind its Recent Rally

It’s important to note that Quantumscape’s turbo-charged rally came on the heels of essentially zero news directly out of the company. In fact, except for announcing its upcoming quarterly earnings release (scheduled for Feb. 15), QS has not issued a press release since Dec. 20.

Hence, it’s all but certain that two factors drove the QS stock rally. Both of them are market-related, not company-related, and have little to do with the company’s underlying business.

First, shares initially got back on an upwards trajectory, thanks to the rise in overall optimism among investors.

With signs that inflation is cooling, and increased hopes of a Federal Reserve “pivot” on interest rates, speculative growth stocks such as QS, after months of falling out of favor, rapidly came back into favor.

Second, is the renewed buzz surrounding this stock’s “short squeeze” potential.

Over the past few weeks, a series of what can be best described as “squeeze waves” have temporarily spiked shares higher, due to increased inflows from retail speculators. Yet while traders who caught onto these trends at their onset have yielded fast profits, it’s too late to take advantage. Both factors have started to fade.

A Quick Trip Back to Pre-Rally Prices

More recent statements from Federal Reserve Chairman Jerome Powell signal that, while disinflation has started, it is only in the early stages. To aid further deflation, the central bank remains set on continuing to gradually increase interest rates further.

With this, investors are starting to cycle back out of speculative growth stocks. Not only that, the recent frenzy for short-squeeze stocks appears to be fading as well. As it appears that both these trends will no longer be on its side, QS stock is in a very vulnerable position right now.

Already pricing-in its future potential at around $5 per share, at $9 per share QS prices-in this potential as a near-certainty. This is not sustainable, as the company has yet to prove that it can bring a cheaper, safer, and stronger EV battery to market.

With its future up in the air, barring any unexpected breakthroughs, investors will likely use subsequent corporate events as an excuse to sell. A good example is next week’s earnings report. If management once again is scant on the details when it comes to Quantumscape’s timeline to the monetization stage, shares could experience a quick trip back to pre-rally prices.

The Takeaway

Besides the risk Quantumscape coughs back recent gains in a post-earnings sell-off, QS is also still at risk of hitting new lows between now, and when it (possibly) moves out of the research and development (or R&D) stage, and into the production stage.

Depending on the degree to which potential risks such as development setbacks or shareholder dilution play out, instead of charging its way back above $10, $15, or even $20 per share, Quantumscape could tumble deep into penny stock territory, changing hands for just a few dollars per share.

Considering these risks, and the fact there’s too little out there to give credence to the bull case, the takeaway with QS stock is clear. If you bought before the big rally, it’s time to take profits. If you’ve yet to enter a position, avoid it at all costs.

QS stock earns a D rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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