While the subreddit WallStreetBets' (WSB) large wagers against short sellers and the resulting short squeezes have caused the shares of several companies to skyrocket in price, they have also resulted in high valuations for several fundamentally weak companies. So, we believe overvalued WSB stocks Root Inc. (ROOT) and Wrap Technologies (NASDAQ:WRAP), with bleak growth prospects, are best avoided now. Conversely, we think AZZ Inc . (NYSE:AZZ) and Del Taco Restaurant (TACO) should continue to deliver big gains and could be ideal picks now. So, read on.Following the success with GameStop Corporation (NYSE:GME) earlier this year, Reddit's WallStreetBets (WSB) community, which is known for betting on heavily shorted companies and squeezing out short-selling hedge funds, has triggered price rallies in many other stocks, irrespective of their fundamental strength.
While WSB typically targets fundamentally weak stocks with a considerable level of short interest, we believe that a few of the subreddit’s heavily discussed stocks possess sufficient fundamental strength to generate solid returns. AZZ Inc. (AZZ) and Del Taco Restaurant Inc. (TACO) are two such stocks. They could prove to be long-term winners on the back of their improving fundamentals. So, they could be solid bets now.
In contrast, with extremely high price levels relative to their underlying business fundamentals and financial strength, we think Root Inc. (ROOT) and Wrap Technologies Inc. (WRAP) could suffer a major pullback in the near term. Hence, these stocks are best avoided now.