The right stocks can make you rich and change your life.
The wrong stocks, though… They can do a whole lot more than just “underperform.” If only! They can eviscerate your wealth, bleeding out your hard-won profits.
They’re pure portfolio poison.
Surprisingly, not many investors want to talk about this. You certainly don’t hear about the danger in the mainstream media – until it’s too late.
That’s not to suggest they’re obscure companies – some of the “toxic stocks” I’m going to name for you are in fact regularly in the headlines for other reasons, often in glowing terms.
I’m going to run down the list and give you the chance to learn the names of three companies I think everyone should own instead.
But first, if you own any or all of these “toxic stocks,” sell them today…
Avis Budget Group (NASDAQ: CAR)
Avis Budget Group (CAR) has become one of the most overcrowded stocks among hedge funds, with more than half of its float owned by professional traders, according to recent data from Morgan Stanley. While this may indicate strong interest from institutional investors, it also raises significant concerns about overvaluation and increased volatility.
Owning overcrowded stocks can lead to muted portfolio gains, as it becomes harder to attract additional investors, creating a risk of a sell-off if sentiment shifts. The company’s stock may face pressure as more institutional investors pull back, especially if broader market conditions turn volatile.
Morgan Stanley’s research suggests that crowded stocks tend to underperform in the long run, and caution should be exercised when investing in stocks with high ownership concentration. Given Avis’s position as one of the most crowded trades, this stock is best avoided for the time being. Investors should look elsewhere for opportunities with better growth potential and less risk of sudden price swings.
QuantumScape (QS)
QuantumScape (QS) is making strides in revolutionizing electric vehicle (EV) battery technology with its solid-state lithium-metal batteries. However, while the company has secured notable partnerships, such as one with Volkswagen, and made some progress with its technology, it remains a highly speculative and risky investment.
The stock is currently down 96% from its peak price four years ago and is trading near an all-time low. Despite advancements in battery testing and the shipment of B-sample cells for further evaluation, QuantumScape continues to burn cash. The company reported an operating loss of $397 million for the first nine months of this year, up from $354 million the previous year, and is pre-revenue. While its agreement with Volkswagen’s PowerCo extends its runway by 18 months, the company will not generate positive net income until at least 2029, according to analysts.
Given the high level of risk, continued cash burn, and lack of revenue generation in the near term, QuantumScape remains a highly speculative investment. While the technology has potential, there are several hurdles to overcome before it can be scaled and commercialized. Until there is more clarity on the company’s path to profitability, investors should avoid QuantumScape and look for less risky opportunities.
Reddit (RDDT)
Reddit (RDDT) has garnered significant attention since its IPO in March, with the stock surging by over 150%. However, despite the impressive gains, the stock appears to have become overvalued, and investors may want to take a step back before jumping in.
The company has experienced strong revenue growth, with a 57% increase in the first nine months of 2024, reaching $872 million. However, this has been overshadowed by a substantial rise in costs and expenses, which increased by 113%, resulting in a loss of $555 million. While Reddit did report a net income of $30 million in the third quarter, showing some signs of improvement, its financials remain weak overall. Analysts are projecting positive net income for 2025 and a 30% increase in revenue, but with a slowing growth rate, the future prospects may not be as promising as the current stock price suggests.
Reddit’s price-to-sales ratio of 17 and a forward price-to-earnings ratio of 72 indicate that the stock has become quite expensive, especially considering the company’s financial struggles. While Reddit maintains a unique position in the social media space, with its community-based model and large user base, the stock’s high valuation relative to its current performance makes it a risky bet at this point.
Given the stock’s overvaluation and the slowing growth projections, it’s best to avoid Reddit for now. Investors looking for more stable, undervalued opportunities may want to steer clear of this one.
