A risky yet potentially rewarding strategy is betting against companies on their way to financial ruin. While shorting stocks does expose investors to potentially infinite losses if a stock irrationally spikes higher, companies with poor fundamentals and who consistently dilute investors typically pay for it. In many cases, these are zombie companies on their last legs. But is now the time to bet against these struggling businesses?
In my experience, companies constantly battling dilution and executing reverse splits to remain listed often have a number of underlying issues. Management teams putting shareholders last rarely right the ship. Meanwhile, most investors aren’t willing to catch a falling knife or support such questionable leadership, leading to a lower share price and more dilution still.
Now, before you start shorting any stock, it is important to remember that this is a risky strategy. Unlike going long a stock, going short exposes you to potentially infinite losses. These businesses may not have the best fundamentals, but they can occasionally spike up to incredible levels before coming back down again. Thus, I recommend against putting anything significant into such stocks and playing the game carefully. Let’s start!
Mullen Automotive (MULN)
At first glance, Mullen Automotive (NASDAQ:MULN) seems to have potential. As an emerging EV startup, it aims to compete with the likes of Rivian (NASDAQ:RIVN) and Lucid (NASDAQ:LCID) in the growing electric vehicle space. However, you should have serious doubts about the viability of this business in its current state. Personally, I believe Mullen is one of the worst EV stocks you can currently purchase in the market today.
This stock has been in perpetual decline, fueled by endless dilution and reverse stock splits. Mullen was previously one of the more promising EV ventures during the pandemic boom, even trading at a frothy valuation. But its flagship models have faced delay after delay, such that the competition is now far ahead. Currently, Mullen’s overpriced trucks would struggle to gain traction even if released immediately.
Mullen now closely resembles a cash incinerator, given management’s empty promises and rampant dilution. Personally, I cannot comprehend why any investor would willingly purchase this stock. Of course, timing the market is an inexact science. Perhaps speculative traders can turn quick profits on temporary spikes. But fundamentally, Mullen needs a massive overhaul before warranting sincere consideration.
Faraday Future Intelligent Electric (FFIE)
Turning to Faraday Future (NASDAQ:FFIE), this EV player tells a similar tale of dilution and disappointment. In 2022 alone, Faraday burned through roughly $602 million against a current market cap of just $14 million. With cash dwindling, I expect Faraday could be the first to go bankrupt among this trio.
While Mullen’s trucks may find limited adoption one day, Faraday’s flagship FF91 vehicle puzzles me. Beyond the constant delays, nothing about the FF91 seems special enough to justify its ridiculous $309,000+ sticker price. A comparable luxury EV – the 2016 Tesla Model S P90D – sells for $30,000 to $40,000 (used) presently. The FF91 boasts only marginally better performance metrics in certain areas. At these exorbitant rates, I doubt the FF91 will gain much traction, especially with minimal brand recognition.
The company’s underlying business is on life support. Perhaps pipe dreams and speculative hype could produce short-term spikes. However, given the continuous dilution with FFIE stock, any short-term surges seem unlikely to last.
Shifting to the lone non-EV stock on this list, Momentus (NASDAQ:MNTS) focuses on space transport services for satellites. And while Momentus finally generated some revenue over the past two quarters, the company’s cash situation looks grim.
In 2022, Momentus burned through roughly $95 million. Compared to its current market cap of $16 million, this cash burn rate looks very alarming. Moreover, the bleeding has continued, with $15 million in losses reported last quarter alone. At this rate, the company’s $10 million cash balance is going to evaporate quickly.
Despite potential revenue growth ahead, continued dilution seems all but guaranteed. Any positive developments for Momentus may be rendered moot via perpetual share issuances. Ultimately, existing shareholders could be left holding the bag, even if the business does take off.
Omor Ibne Ehsan is a writer at InvestorPlace. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.