With gold prices soaring over the past several weeks, many investors naturally fear inflation is about to ripple through the economy. Adding to those concerns, consumers have witnessed price increases at gas stations and grocery stores. Of course, rising prices hurt consumer sentiment, which in turn negatively impacts stocks. Therefore, many investors are rotating out of risk-on names, avoiding the urge to catch a falling knife.
Still, I’m not entirely sure we’re going to see inflation. Sure, prices in certain market segments have jumped higher, but that could also be due to acute circumstances, such as the ransomware attack on the Colonial Pipeline. So no, I don’t see inflation. I see something much, much worse: chronic deflation. If I’m correct about this, all investors should do well ignoring the falling knife, lest they get stabbed.
Primarily, the productivity of the nation as a whole has recovered from the novel coronavirus pandemic. According to the U.S. Bureau of Economic Analysis, the national gross domestic product (GDP) in the first quarter of 2021 hit just over $22 trillion on an adjusted annualized basis. That means we’re back on schedule, almost as if the pandemic never occurred.
But here’s the kicker. The employment level is still down about 5% from just before the Covid-19 crisis, which translates into millions of jobs evaporated. Here, we have one of the classic hallmarks of deflation: productivity up, overhead down. Put it another way, we have fewer people with means to support current rich valuations, which potentially makes the stock market one giant falling knife.
That so many people are worried about inflation is really the reason why investors should at least consider the bearish argument. I’m not sure how you can have runaway inflation, not when the personal saving rate is so stratospherically high. Therefore, don’t reach out for the falling knife inherent in these stocks to avoid.
One final note before we get into it: This isn’t about hating on certain companies. Rather, this is simply focusing on the reality of the situation. While the broader indices may not have turned into a falling knife, many individual names have.
- Tesla (NASDAQ:TSLA)
- Lithia Motors (NYSE:LAD)
- Bit Mining (NYSE:BTCM)
- Virgin Galactic (NYSE:SPCE)
- Lumber Liquidators (NYSE:LL)
- The New York Times Company (NYSE:NYT)
- Alpha Pro Tech (NYSEAMERICAN:APT)
Falling Knife Stocks: Tesla (TSLA)
Anytime you question fan-favorite Tesla, you’re bound to receive huge heaps of criticisms. Naturally, I hesitate to call TSLA stock a falling knife. But objectively speaking — and at time of writing — that’s exactly what Tesla has become. Over the trailing month, shares have lost more than 18%. That’s bad enough, but it looks extremely conspicuous when you consider TSLA’s prior mercurial performance.
Undoubtedly, the Tesla faithful will consider this dip a buying opportunity. Again, I think it might be a falling knife for two reasons. First, electric vehicles (EVs) are very expensive. If you’ll notice, people are crazy about used cars right now, largely due to the semiconductor supply chain disruption. But they’re mostly buying combustion-engine cars, not EVs. Globally, EVs represent only a small portion of total auto sales.
Second, Tesla has serious competition — and some of CEO Elon Musk’s lovable ways may have become a liability. Recently, Ford (NYSE:F) unveiled its electric F-150 Lightning, which will truly gauge Americans’ interest in electric trucks. While I can’t say for certain if Ford will be a resounding success, the electric F-150 is off to a good start by looking normal.
On the other hand, the Tesla Cybertruck is, well, special. Maybe I’m wrong to be skeptical, but I think TSLA faces tough challenges ahead.
Lithia Motors (LAD)
While I’m on the automotive theme, it might be a good idea to bring up Lithia Motors. A nationwide car retailer, it’s one of the country’s biggest such businesses. Naturally, the surge in auto sales that I mentioned above have been a boon for LAD stock. Indeed, first-time car buyers concerned about coronavirus infections on public transportation helped bolster demand.
You can see the results for yourself. On a year-to-date basis, LAD is up 19%. Over the trailing year, it’s up 194%. So, why in the world is Lithia considered a falling knife? Have I lost my mind?
To answer the second question, it’s possible. But regarding the first question, I believe that it’s probable due to worrying technical signals. Don’t get me wrong — I don’t think Lithia is a bad company. But I must defer to what the market is telling me. If I’m interpreting the price action correctly, this is one of those cases where the falling knife hasn’t quite fallen yet. It’s just perched in a precarious position.
Have you seen one of those tacky Final Destination movies? Basically, LAD is a setup. For whatever reason, traders now feel very uncomfortable with car dealerships. You’d be wise to avoid this one until shares stabilize.
Bit Mining (BTCM)
Bit Mining could be responsible for one of the most poorly timed corporate announcements ever. Based in Shenzhen, China, the company disclosed that it will invest in Texas Mining Center, a cryptocurrency data-mining center. If the news had materialized six months ago, it likely would have been met with much excitement and fanfare. Now, it’s a liability.
Bit Mining is a falling knife, and I’m unapologetic describing it as such. To be clear, there’s nothing wrong about the crypto-mining business. Over time, virtual currencies could upend the traditional investment markets. Thanks to decentralized technologies, you can trade cryptocurrencies anywhere, anytime (barring government crackdowns, of course).
Unfortunately, crackdowns and heftier regulations impose a dark cloud on cryptocurrencies. And because crypto mining is capital intensive, that weighs heavily on BTCM stock and its profitability potential. Further, BTCM is particularly under the gun because the severest crackdown is coming from its home turf of China.
Logically, the crypto sector saw the wind knocked out of it. Beyond that, the institutions that previously bought cryptocurrencies have got to be thinking about dumping. Many have shareholders to answer to, which may mean a dark winter is coming.
Virgin Galactic (SPCE)
Initially, Virgin Galactic may seem a strange choice for inclusion on this list. Yes, it’s very much a falling knife, but most of the evidence indicates that it already has dropped. From its closing peak in February of this year, SPCE stock hemorrhaged an extremely alarming 58%. When you look at it from a risk-reward perspective, you probably don’t want to short this name.
But on the other hand, is it a contrarian buy? If I may be blunt, I think there’s a great chance that SPCE will make another round as a falling knife. While the space tourism and commercial scientific exploration angles are groundbreaking, they might not pan out. As I mentioned in prior articles about SPCE, historically, ultra-premium aeronautics businesses such as Concorde have floundered.
Moving up several notches from the ground doesn’t exactly instill confidence for me.
Apparently, I’m not the only one that’s hesitant. The market is giving clear signals of bearishness. Even the latest rebound falls well short of the 50-day and 200-day moving averages. In my opinion, any dramatic spikes are likely dead cat bounces, giving badly devastated stakeholders an opportunity to jump out at a better price — just like Virgin Galactic chairman Chamath Palihapitiya did.
Lumber Liquidators (LL)
A brand that’s sure to arouse controversy, Lumber Liquidators already suffered from a falling knife to its equity unit price years ago due to the formaldehyde controversy. At its peak, LL stock was closing in on $120. And right before the disastrous 60 Minutes investigation hit the market, it traded hands for nearly $70.
For a time, Lumber Liquidators finally had headlines to smile about. Due to the global supply chain disruption causing all kinds of havoc, lumber prices soared through the roof. As well, strong housing demand meant that consumers were willing to pay these premiums regardless. Further, you can argue that the Covid-19 stimulus checks helped cushion the blow of said rising prices, which, theoretically, was great news for LL.
Unfortunately, reality has a way of busting up theory. When it came time to deliver the goods, Lumber Liquidators fell short, producing a mixed bag of results for its Q1 earnings report. To be honest, it wasn’t a terrible outing. However, covering analysts wanted more considering the circumstances.
Also, LL shares look disconcertingly weak, having dipped below their 50 and 200 DMAs not too long ago. In my view, this appears like a falling knife in waiting.
The New York Times Company (NYT)
I can imagine that former President Donald Trump is not a happy camper. Without the insulation that the highest office of the land offers, Trump is essentially a private citizen. Mind you, he’s the type of private citizen that gets lifetime protection from the Secret Service. Nevertheless, even those fine folks can’t take a legal bullet for the man.
Mounting legal troubles, along with what the Washington Post described as a slide toward “online irrelevance” have certainly hurt Trump’s ego. Still, I think there’s a bitter irony in the left-leaning media’s excoriation of the controversial leader. You see, the mainstream media has nothing titillating to discuss, which has hurt the business case of New York Times.
To be fair, I wouldn’t quite call NYT stock a falling knife, not quite to the extent that we’ve seen some of the other names on this list produce. Still, with a trailing one-month loss of nearly 9%, NYT is only making Trump smile for his consolation prize. Of course, that must drive shareholders of the vaunted newspaper absolutely nuts.
Could it be a discounted opportunity, though? I’d be careful. Cable news ratings continue to plummet and for good reason: Washington politics without Trump is really boring.
Alpha Pro Tech (APT)
Before I get into this one, let’s give Alpha Pro Tech some credit. Yes, we can talk about how APT stock shed over 37% for the year and is down nearly 30% over the trailing six months. But that doesn’t take away from the fact that Alpha Pro was one of the big winners when the Covid-19 disaster initially hit us. At the height of its power, APT closed at nearly $25.
Even afterward, shares didn’t crater like you would expect a falling knife to do. Instead, APT had one last shining bit of glory this year, enjoying a few sessions near or above $19. Since then, though, the equity unit of the personal protective equipment (PPE) manufacturer tumbled badly.
Is it possible that Covid-19 could surge again, driving up the narrative for APT? Look, anything is possible, especially in the new normal. However, Americans have proven very resilient. You’re just not going to see roughly half of the population adopt PPE measures like facemasks beyond what is absolutely necessary.
However, that takes away the cynical angle for Alpha Pro Tech, which means this is one to avoid.
On the date of publication, Josh Enomoto held a SHORT position in TSLA and a LONG position in F and gold. 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.