Reverse Split Red Flags: 3 Stocks Flashing Warning Signs to Sell
The stocks discussed below are all flashing various warning signs that alert investors to sell. Each of these three companies has initiated a reverse stock split in the past. Some have initiated several.
If you are unfamiliar with how reverse stock spits operate, this a quick explaination. Let’s say you own 10 shares of a given stock. That stock is also very weak and the price is falling. A company might then choose to initiate a reverse stock split whereby those 10 stocks are converted into a single stock. The idea is to raise the share price but the market rarely perceives it as that. Much more often it is perceived as an act of desperation intended to artificially inflate the price of a weak stock.
Reverse stock splits are common to each of the companies discussed below but hardly the only negative factor for each.
Mullen Automotive (MULN)
Mullen Automotive (NASDAQ:MULN) is one of the first stocks that is bound to come up on any sell list. It’s also one of the most egregious companies in terms of initiating reverse stock splits. The company has enacted five separate reverse stock splits over the course of its history as a publicly traded firm. Three of those splits occurred in 2023 alone. It’s very clear that the company is highly distressed.
The result is that not only is the company in trouble but the shares themselves are highly diluted. Basically, Mullen Automotive continues to issue stocks which end up appearing more attractive given their lower price. In turn, that attracts more investors who presume they may be able to profit from future gains they anticipate.
The company has been successful in fooling investors with stock splits but do not be mistaken, Mullen Automotive is at high risk of bankruptcy. Its Altman Z-score tells that story very clearly.
Meta Materials (MMAT)
Meta Materials (NASDAQ:MMAT) is a high-tech company producing photo-optic materials and nanocomposites. Is also an excellent example of a distressed company and one to avoid at all costs.
The company’s value has fallen by more than 60% in 2024. At the same time the company also needs to raise capital in order to commercialize its products. Its solution is to increase its authorized stock count from 10 million to 250 million.
Any logical investors should expect further dilution for Meta Materials and its stock. The company has already enacted a one for 100 reverse stock split and a $3.4 million direct offering. Yet, company management continues to expect investors to acquiesce to its demand for further dilutive capital raises.
Investors are well aware of the need for capital in the pursuit of commercialization. However, they would be foolish to continue to allow the dilution of their shares based on the company’s results. As it stands, Meta Materials bears all the hallmarks of a failing company that will continue to head lower.
Canoo (GOEV)
Canoo (NASDAQ:GOEV) is one of many special purpose acquisition company (SPAC) EV stocks that are failing. And like the other firms on this list Canoo has also initiated a reverse stock split.
The company initiated a 1-for-23 stock split in March. Share prices did improve since then however it remains too risky overall. The irony is that several well-respected analysts continue to sing Canoo’s praises. Those analysts are bullish on the company’s backlog which will require additional capital in order for fulfillment.
I’m less concerned about the fact that the company spends twice as much on private jet bills in 2023 than it produced in revenues. Instead, I’m more interested in the fact that the company lost $302 million dollars in 2023.
The news that Fed rate cuts may come much later than previously anticipated only compounds the company’s problems. Capital will remain more expensive for longer. That truth is but one more reason to land GOEV on your list of stocks to sell.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
