Avoid Chinese penny stocks; Short-seller reports on DraftKings (DKNG) and Rezolve AI (RZLV); Palantir Technologies (PLTR) and AppLovin (APP) are still overvalued; Signet Jewelers (SIG) could turn into a value trap

I've said it before and I'll say it again: The key to long-term investment success is avoiding big losses.

For example, divorce is a quick way to lose half your money. And there are tons of scams to look out for, like the one that made my great aunt almost lose $10,000... as well as dating scams (that young, sexy woman you've never met who texted you out of the blue is not interested in a romantic relationship).

Big losses can also come from leverage (borrowed money), options, and/or risky investments in real estate, cryptocurrencies, private companies, and dicey stocks.

So with this in mind, today I'd like to highlight some stocks to avoid (but as always, I don't recommend that anyone short stocks – it's too dangerous)...

1) Avoid all penny stocks, especially those from China.

It's an absolute disgrace that the Nasdaq has allowed obvious frauds to trade on its exchange. As this article in today's Wall Street Journal notes, it has become the market of choice for penny-stock IPOs with dubious financials:

These stocks often lure everyday investors before they tumble. Some have produced remarkable gains following announcements related to a name change, cryptocurrencies or artificial intelligence.

At least the Nasdaq is finally taking steps to rein this in – sort of:

Nasdaq has promised to clean up its act and on Sept. 3 asked the Securities and Exchange Commission ["SEC"] for permission to tighten its listing standards, especially for small Chinese stocks. This followed criticism by investors and lawmakers that such listings had become breeding grounds for scams and manipulation. Final approval by the SEC could be months away.

While it waits, Nasdaq keeps greenlighting new listings that wouldn't meet its proposed new criteria. The head-scratcher is why Nasdaq ever allowed as many dodgy listings as it did. While each one means higher listing fees and trading volumes, the revenues at stake are small, compared with the potential for harm to investors and Nasdaq's own reputation.

The article notes that most of these recent IPOs have been from China, including Hong Kong and Macau.

As a first step, the SEC should ban these companies from listing on all U.S. exchanges.

2) On social platform X, short seller Edwin Dorsey of The Bear Cave newsletter posted a list of stocks being promoted by overseas stock manipulators:

He links to a website, StopNasdaqChinaFraud.com, that helps shed light on these fraudulent stocks and how their schemes operate.

3) In mid-September, Dorsey also published a report highlighting the issues with sports-betting site DraftKings (DKNG). The full report is only available to subscribers, but here is an excerpt:

Investors have viewed DraftKings and its main competitor, FanDuel, as an effective duopoly aggressively wooing players with signup bonuses in hopes of ultimately establishing a high-margin base of repeat customers. The Bear Cave believes that narrative is being disrupted by prediction markets like Kalshi, which often offer customers better odds with deeper order books. In short, The Bear Cave believes prediction markets are a real and growing headwind for DraftKings and will turn an effective duopoly into a competitive marketplace with DraftKings on the defensive...

Last week, Dorsey published a follow-up note:

Since then, prediction markets have gone mainstream. South Park dedicated an episode to prediction markets and the Wall Street Journal highlighted Kalshi's rise in football betting. And on Monday, Kalshi rolled out its first real push into parlays, which are the most profitable segment of traditional sportsbooks. Volume on prediction markets has continued to explode and the imminent launch of Polymarket, another prediction market platform that plans to offer sports betting, will only accelerate the trend.

Lastly, on Sunday, Dorsey highlighted a report by another short seller, Spruce Point, which raised similar issues with DraftKings and other prediction-market stocks:

Spruce Point highlighted the growing competitive risk posed by prediction markets like Kalshi, which Spruce Point found often offers better odds than incumbent online sportsbooks. Spruce Point also highlighted Kalshi's fast growth in sports markets and said incumbents like DraftKings "are stuck between a rock and a hard place" because they are constrained by regulators in a way prediction markets are not and if they launched their own prediction markets it would be at economics less favorable than their current offerings.

4) Also on Sunday, Dorsey shared and summarized two different short-seller reports about AI company Rezolve AI (RZLV):

Fuzzy Panda Research published on Rezolve AI, which makes AI-powered solutions for e-commerce companies. Fuzzy Panda called Rezolve "a $2bn market cap [special purpose acquisition company] that used to be a mobile phone tech [company] created by a CEO infamous for fake customers & fake partnerships." Fuzzy Panda alleged the company was essentially a "ChatGPT wrapper" with minimal proprietary tech and raised concerns about related party transactions with the company's CEO.

Grizzly Research also published on Rezolve AI and "[concluded] that the business is nothing more than smoke and mirrors." Grizzly alleged the company's growth is being driven by low-quality acquisitions and compared Rezolve AI to previous failed ventures of the CEO. Grizzly also highlighted very critical Glassdoor reviews on the company with one former employee calling it "a complete dumpster fire" and several others complaining of delayed paychecks.

5) When I last wrote about software company Palantir Technologies (PLTR) on August 11, it was trading at 106 times this year's revenues and 288 times this year's expected earnings. And I concluded that its stock "is at least 4 times overvalued in my opinion."

Since then, the stock has been roughly flat, and my view hasn't changed.

6) I've warned by readers about software maker AppLovin (APP) five times this year, which you can see in this archive. It's almost as absurdly overvalued as Palantir, at around 40 times revenue.

It seems my warnings were too early, as the stock has soared this year.

But I think we'll look back on Monday's 14% decline as the beginning of the end (though it has recovered half that loss since then)...

The decline was triggered by the SEC investigating AppLovin's data-collection practices, as reported by Bloomberg:

The [SEC] has specifically looked into allegations that AppLovin violated platform partners' service agreements to push more targeted advertising to consumers...

The SEC is responding to a whistleblower complaint filed earlier this year, as well as multiple short-seller reports published in the past several months, the people said. SEC probes don’t always result in enforcement actions by the regulator, but they can lead to fines for companies or corporate officials if the agency determines there were violations.

7) Signet Jewelers (SIG) has also rallied strongly since I took a first look at the company on January 15.

On January 16, I did a deeper dive and concluded that there was "a looming threat that could turn Signet into a value trap: the rise of lab-grown (synthetic) diamonds."

I'm now even more convinced that this threat is real after watching this WSJ video posted on YouTube: The Complex Tech Behind Growing Diamonds in Minutes.

Why would any customer pay seven to 10 times more for a natural diamond, when lab-grown ones are virtually indistinguishable?

In conclusion, make sure to steer clear of these and similar stocks so you can avoid big losses.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.