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 closing bell tolled, the iconic Dow Jones Industrial Average led all indexes with a year-to-date 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 up the caboose with a gain of 2.8%.
While these are fantastic numbers that could put all three indexes on track to surpass their historic average annual returns, they’re peanuts compared to the performance of a trio of supercharged, ultra-popular stocks during the first quarter. If you had the foresight, luck, and wherewithal to invest $200,000 into these companies on Dec. 31, 2020, you’d have well over $1 million sitting in your account at the end of the first quarter.
GameStop: $2.02 million
Among brand-name businesses, you’d be hard-pressed to find a better performing stock in the first quarter than video game and accessories retailer GameStop (NYSE:GME). An investment of $200,000 held the entire quarter would now be worth a shade over $2 million, representing a return of 910%!
There were three catalysts that sent GameStop higher in Q1, albeit one held considerably more weight than the other two. To begin with, GameStop has been the premier stock piled into by Reddit investors in the WallStreetBets chat room. It was the most short-sold company in the middle of January, making it the perfect target by retail investors for a short squeeze. This influence by Reddit traders is the key reason GameStop’s share price has soared.
A second reason we’ve witnessed upside in GameStop’s share price is its e-commerce growth. With the company now focusing its attention on digital gaming, e-commerce sales more than quadrupled during the 2020 holiday season, compared to the prior-year period.
And third, it can’t 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-focused e-commerce company Chewy. His experience in online retail should be invaluable as GameStop looks to reach new users.
However, I’d caution that GameStop remains a dangerous company from an investment standpoint. Despite substantial growth from e-commerce, total sales declined 21% last year as the company shuttered 12% of its stores. This has always been a brick-and-mortar model, and the company simply waited too long to transition to digital gaming. With profitability likely two or three years away, GameStop’s current valuation looks far too rich.
Koss Corp.: $1.32 million
If completely under-the-radar outperformers are more your thing, then you’ll be happy to know that headphone, Bluetooth speaker, and headset manufacturer and retailer Koss (NASDAQ:KOSS) kicked butt in the first quarter. The company’s 560% gain in Q1 would have turned a $200,000 investment into a cool $1.32 million.
The good fortune for Koss can be traced to two factors. First, just like GameStop, Koss was part of the Reddit wave. It’s not that Koss was a heavily short-sold company, so much that it has a low float (i.e., number of tradable shares), which made it a lot easier to send its share price skyrocketing higher during 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 shift from retailers to direct-to-consumer via U.S. and European distributors. Supplying its products on a direct-to-consumer basis generates better margins than traditional retail. As a result, the company’s fiscal second quarter results featured a profit, compared to a year-ago loss.
But like GameStop, there are warning flags. For instance, Koss had a $506,000 Paycheck Protection Program loan forgiven, which the company recorded as income. Without this one-time benefit, Koss didn’t even generate $3,000 in income in the fiscal second quarter and is only marginally profitable on a per-share basis through the first six months of its current fiscal year.
What’s more, the company manufactures products that are prone to commoditization and margin pressure. Koss has been trading at a sales multiple of 0.5 to 1.1 for a decade, so it doesn’t make a lot of sense for the company to now be valued at 10 times projected full-year sales.
Zomedica: $1.38 million
Finally, clinical-stage veterinary drug and diagnostics company Zomedica (NYSEMKT:ZOM) had a stellar quarter. When the checkered flag waved, it had turned $200,000 into $1.38 million, which works out to a nominal gain of 590%.
Not to sound like a broken record, but the vast majority of Zomedica’s gains can be tied to the Reddit rallies of the first quarter. Zomedica has been a target of short-sellers and retail investors on Reddit’s platform who were angling for a short squeeze.
Additionally, Zomedica was name-dropped by 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 has been its ability to raise capital in recent months. Between direct offerings and the exercising of warrants, it ended February with approximately $277.5 million in cash. This should be more-than-enough capital to fund its research and operations for years.
But just like GameStop and Koss, there are clear red flags here. Even though Zomedica launched its first-ever diagnostics system for cats and dogs this past week, it’s not expected to generate more than $20 million in full-year sales until 2023, according to Wall Street. This means investors are paying more than 70 times sales for a company that probably won’t be profitable anytime soon.
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 over 305 million shares of stock. With 947.3 million shares outstanding, it’ll be virtually impossible for the company to generate meaningful profit per share.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.