Subreddit r/wallstreetbets (WSB) has transformed the world of investing and dramatically reshaped the financial markets. WSB has driven skyrocketing rallies in some fundamentally poor stocks this year and successfully squeezed short-sellers out of their holdings. However, the fundamental weaknesses of many such stocks have caused the rally to end for some.

Furthermore, the rising uncertainties related to the emergence of the newly found coronavirus strain could wash out stock market gains in the weeks ahead. Given mounting concerns about the new variant's implications on economic activity and inflationary pressure, investors should be cautiously positioning themselves to endure a potential pullback in the near term.

So, we believe speculative overvalued stocks such Lucid Group Inc. (LCID) and Upstart Holdings Inc. (UPST), which are current favorites of Reddit investors, are best avoided now.

Lucid Group Inc. (LCID)

LCID develops electric vehicle (EV) technologies. The company designs electric cars, EV powertrains, and battery systems. It operated eight retail studios in the United States as of June 30, 2021.

In August, a class-action lawsuit was filed against LCID and CCIV for allegedly making false statements and failing to disclose information about the company's business, operations, and prospects. According to the complaint, the companies failed to disclose that LCID was not prepared to deliver vehicles by the spring of 2021, and it projected production of 557 vehicles in 2021, less than the 6,000 vehicles announced in the run-up to the merger with CCIV.

For the third quarter that ended June 30, 2021, LCID’s operating expenses increased 205.2% year-over-year to $493.96 million. Its operating loss grew 206.6% from the year-ago value to $497.05 million. Its net loss surged 225.2% from the prior-year quarter to $524.40 million. In addition, the company reported a negative adjusted EBITDA of $244.96 million over this period.

The company's EPS is expected to remain negative in the current year and is expected to decline at the rate of 38.7% per annum over the next five years.

In terms of forward Price/Book, LCID is currently trading at 17.52x, 477.8% higher than the industry average of 3.03x. In addition, its forward Price/Sales of 3780.98x compares with the industry average of 1.23x.

LCID’s POWR ratings are consistent with this bleak outlook. The stock has an overall grade of F, which translates to a Strong Sell rating in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

LCID has an F grade for Stability, Value, and Quality. Within the F-rated Auto & Vehicle Manufacturers industry, it is ranked #55 of 63 stocks.

To see additional POWR Ratings for Growth, Sentiment, and Momentum for LCID, click here.

Upstart Holdings Inc. (UPST)

UPST operates a cloud-based artificial intelligence lending platform. The platform gathers customer demand for loans and connects it to its network of AI-enabled bank partners. In addition, the company connects individuals, banks, and institutional investors via a common AI lending platform.

In August, UPST announced the pricing of $575 million aggregate principal amount of Convertible Senior Notes due 2026. The company intends to use approximately $50.9 million of the net proceeds from the offering of the notes to pay the cost of the capped call transactions.

UPST’s operating expenses increased 275.9% year-over-year to $199.85 million in the third quarter that ended September 30, 2021. The company’s net cash used in investing activities came in at $124.10 million for the nine months ended September 30, 2021. The stock has declined 36% over the past month.

In terms of forward Price/Sales, UPST is currently trading at 21.28x, 555.8% higher than the industry average of 3.22x. Also, in terms of its forward EV/Sales, the stock is currently trading at 20.89x, 577.7% higher than the industry average of 3.08x.

UPST’s weak fundamentals are reflected in its POWR ratings. The stock also has an F grade for Stability, and a D for Value. In the D-rated Financial Services (Enterprise) industry, it is ranked #75 out of 137 stocks.

In addition to the POWR Ratings grades I have just highlighted, you can see UPST’s grades for Sentiment, Momentum, Quality, and Growth here.

LCID shares fell $0.26 (-0.47%) in after-hours trading Monday. Year-to-date, LCID has gained 450.05%, versus a 25.48% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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