This past Wednesday, the curtain closed on what was a relatively tame first quarter – at least compared to what happened in the previous year. When the lock clock rang, it became an icon Dow Jones Industrial Average lead all indices with a year-on-day gain of 7.8%. This was followed by a rise in the benchmark S&P 500 of 5.8%. The tech-heavy Nasdaq Composite brought the caboose with a gain of 2.8%.
While these are fantastic numbers that could put all three indices on course to surpass their historical average annual returns, they are peanuts compared to the performance of a trio of supercharged, ultra-popular stocks in the first quarter. If you were the prospect, lucky and with whom you would invest $ 31,000,000 in these companies on December 31, 2020, you would have a good $ 1 million in your account at the end of the first quarter.
GameStop: $ 2.02 million
Branded companies would be hard pressed to find a better performing stock in the first quarter than retailers of video games and accessories GameStop (NYSE: GME), A $ 200,000 investment that lasted the entire quarter, would now be worth a shadow over $ 2 million, representing a return of 910%!
There were three catalysts that sent GameStop higher in Q1, although one was much more important than the other two. To begin with, GameStop has been the main action taken by Reddit investors in the WallStreetBets chat room. It was the most short-selling company in mid-January, making it the perfect target by retail investors for a short squeeze. This influence by Reddit traders is the main reason for GameStop’s share price.
A second reason we’re upside down GameStop’s share price is the growth of e-commerce. With the company now turning its attention to digital gaming, e-commerce sales more than quadrupled in the holiday season 2020, compared to the period of previous year.
And thirdly, it cannot be overlooked that GameStop added Ryan Cohen to its board of directors to help with the company’s digital transformation. Cohen is the founder and former CEO of pet-oriented e-commerce company Tough, His experience in online retail should be invaluable, as GameStop seems to reach new users.
However, I would warn that GameStop remains a risky business from an investment perspective. Despite substantial growth in e-commerce, total sales fell by 21% last year when the company closed 12% of its stores. This has always been a brick-and-mortar model, and the company just waited too long for the transition to digital gaming. With profitability likely two or three years away, GameStop’s current rating looks far too rich.
Koss Corp .: $ 1.32 million
If full outperformers under the radar are more your thing, then you’ll be happy to know that the headset, the bluetooth speaker, and the headset manufacturer and retailer Koss (NASDAQ: KOSS) kicked ass in the first quarter. The company’s 560% profit in Q1 would have turned a $ 200,000 investment into a cool $ 1.32 million.
Happiness for Koss can be traced back to two factors. First, just like GameStop, Koss was part of the Reddit wave. It’s not that Koss was a strong short selling company, so much so that it has a low float (i.e. number of tradable shares), which made it much easier to send its share price higher in the first quarter.
The other thing that helped Koss to an excellent Q1 performance was the pandemic. With more people working from home, Koss has seen more of its sales from retailers to direct to consumers through U.S. and European distributors. Delivering their products on a direct basis to consumers generates better margins than traditional retail. As a result, the company’s fiscal results included a second-quarter profit, compared to a year ago loss.
But like GameStop, there are warning flags. Koss, for example, had granted a $ 506,000 loan from Paycheck Protection Program, which the company registered as income. Without this one-time benefit, Koss did not even generate $ 3,000 in revenue in the fiscal second quarter and is only marginally profitable on an equity basis through the first six months of its current fiscal year.
What’s more, the company produces products that are sensitive to commoditization and margin pressure. Koss has been trading at a sales multiple of 0.5 to 1.1 for ten years, so it does not make much sense for the company to now be valued at 10 times projected full-year sales.
Zomedica: $ 1.38 million
Finally, clinical stage veterinary medicine and diagnostics business Zomedica (NEW: ZOM) had a star quarter. When the checkered flag waved, it had changed $ 200,000 to $ 1.38 million, resulting in a nominal gain of 590%.
Not to sound like a broken record, but the vast majority of Zomedica’s profits could be tied to the first-quarter Reddit rallies. Zomedica has been a target of short sellers and retail investors on the Reddit platform hopping for a short squeeze.
In addition, Zomedica was dropped by name Tiger King star Carole Baskin in a YouTube video in January. It was determined after the video was released that Baskin was paid for her promotion of the company.
A third catalyst for Zomedica in recent months has been its ability to raise capital. Between direct bids and the exercise of warrants, February ended with about $ 277.5 million in cash. This should be more than enough capital to fund their research and operations for years to come.
But just like GameStop and Koss, there are clear red flags here. Even though Zomedica launched its first cat and dog diagnostic system last week, Wall Street is not expected to generate more than $ 20 million in full annual sales by 2023. This means that investors will pay more than 70 times sales for a company that is likely to will not soon be profitable.
Zomedica’s share-based dilution has also been difficult to sweep under the rug. In just the first two months of 2021, the company issued more than 305 million shares. With 947.3 million outstanding shares, it will be virtually impossible for the company to generate meaningful earnings per share.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We are bone! Asking questions about an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that will help us become smarter, happier and richer.