One of the most insane years for stocks is now past us. After losing 34% of its value during Q1, the S&P 500 managed to finish 2020 higher by 16%. It was the quickest bear market in history, followed by the most aggressive rebound in history.
It was also a huge year for growing stocks. Around 10% of companies with a value of $300 million or more finished the year higher by at least 100%. That’s a huge number which probably isn’t doable in 2021.
So as we go into the new year, it’s entirely plausible that some of these rock-starts will return to Earth. Below are five popular stocks that could lose 50% as investors re-analyze their investments.
Few industries were more explosive than electric-vehicle makers this year. China’s NIO (NYSE:NIO) was one of the market’s top gainers, with more than a 1,100% increase. NIO has benefited from capacity raises and margins going from negative to positive double-digits. And the company gained billions of dollars in investment last year, which does away with any worries about financing.
But there are two concerns we have. First, NIO is a $76 billion company that’s creating about 50,000 EVs per year. Its market cap is bigger than some non-ev auto stocks, which have multiple lines, can make millions of vehicles per year, and are investing billions into EV technology. So a $76 billion market cap seems overboard.
Another issue is that NIO faces increasing competition from wealthier companies in China. NIO might have the advantage of being based in China, but it’s not completely destroying the competition on the production front. It wouldn’t shock us to see the EV bubble burst this year.
Drug developer Moderna (NASDAQ:MRNA) had a great 2020, thanks mostly to its coronavirus vaccine research. Its COVID-19 vaccine, mRNA-1273, was given emergency authorization by the U.S. FDA. This should mean multiple billions in sales in 2021.
Investors are excited, but there are a couple of issues for Moderna in 2021. The biggest being the other developing vaccines could have an edge over their vaccine. For example, Johnson & Johnson‘s coronavirus vaccine is given in one dose, but Moderna’s is given in two doses. If J&J’s vaccine gives similar efficacy to mRNA-1273, it could turn Moderna’s vaccine into something less desirable.
But even more so, Moderna’s valuation is also a worry. Biotech stocks are usually valued at a multiple of 3 to 6 times peak sales. Moderna has been well over this price point for a good time. Even if their numbers are outstanding in 2021, the outlook isn’t so bright. As other treatments are approved, Moderna’s COVID-19 income is likely to dwindle.
Chipotle Mexican Grill
This year restaurants around the country struggled due to Covid, but the chain Chipotle Mexican Grill (NYSE:CMG) sky-rocketed higher by 66%. With their goal of providing fresh, natural foods, along with their willingness to incorporate digital drive-thru and delivery options, helped them navigate the worst year in decades.
But we are skeptical of a restaurant stock trading at an earnings multiple of 65. And while the addition of virtual drive throughs (Chipotlanes) can be seen as innovation, a multiple of 40 to 65 times forward EPS for a restaurant is very high. There are far too many other factors, such as inflation and labor costs, which can ruin this over-the-top valuation.
Plus, over the past 14 years, Chipotle’s routine has been to go higher for around four years, then lose about half its value. This might happen this year if investors decide to pivot to more fundamentally attractive stocks.
Another very stock that could be hit hard this year is analytics company MicroStrategy (NASDAQ:MSTR). It might not be as well-known as the others on this list, but MicroStrategy has made news by putting over $1.1 billion of its money into bitcoin. As of December, they owned 70,470 bitcoin, bought at a price of $15,964 per coin. This position is now worth over $2 billion.
However, bitcoin has a routine of overextending. The largest cryptocurrency catapulted down more than 80% on multiple occasions over the last 10 years.
It’s easier for me to predict a huge pullback in MicroStrategy because I don’t like bitcoin. I strongly think bitcoin is without game-changing use and real scarcity, which would both be required to call for a $29,000 value per token. Investing in bitcoin gives investors no control over the underlying blockchain technology, which is the only thing that may have real value.
But, if you need more reason to avoid MicroStrategy, their sales were down 1% through most of 2020, with them losing from operational costs increasing 32% to $14 million. Their stock should not be up by 229%.
Lastly, Tesla (NASDAQ:TSLA) is a hugely popular stock that may go in reverse this year. Tesla’s stock skyrocketed a whopping 700% in 2020 after increasing their capacity, raising additional capital, performing a stock split, and joining the S&P 500.
Although electric vehicles are the future of the industry, Tesla went into the fast lane way too soon. Tesla may have made over 500,000 EVs in 2020, but that does not clear a $669 billion valuation.
Tesla has not yet proven it can generate a regular profit from selling EVs. In most of the past quarters, selling their emission credits allowed Tesla to report a small adjusted profit. The margins on EVs aren’t great, which makes their earnings ratio of 184 completely insane.
Tesla’s ability to keep its advantages while other auto makers are investing tens of billions into EVs technology is also in question. It might be my top stock to avoid in 2021.