The "DORKs" Are Going to the Moon -- but Can It Last?

Globe and Mail

5 days ago

Key Points
Momentum investors are glomming on to a quartet of fast-rising stocks: Krispy Kreme, Opendoor, Rocket, and Kohl's.
Three of the four aren't profitable, and the fourth is loaded down with a lot of debt.
The stocks will do well so long as the momentum lasts -- but it won't.
10 stocks we like better than Kohl's ›
Forget about the BRICs, FANG stocks, and the " Magnificent Seven." Lately, the hottest group of momentum stocks"going to the moon" is the "DORKs." For those not in the know, that's the acronym awarded to donut shop Krispy Kreme (NASDAQ: DNUT), home buyer/seller Opendoor Technologies (NASDAQ: OPEN), Rocket Mortgage owner Rocket Companies (NYSE: RKT), and department store Kohl's (NYSE: KSS).
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Over the past couple of weeks, starting about mid-July and running through Friday's close, shares of Krispy Kreme stock had gained 43.5%. Opendoor soared 144.2%, Rocket rose 12.7%, and Kohl's collected a cool 38% gain.
And why? Not because of any substantive news, I can tell you. Over the past two weeks, the most exciting announcements put out by this group of four stocks were Krispy Kreme's announcement of an $0.88-per-donut sale (glazed only) to celebrate its 88th birthday, and Kohl's announcement of savings on back-to-school shopping.
Rocket cited a survey saying it's "#1 for client satisfaction" (yeah, and I've got a mug that assures me I'm the "world's best dad"). Opendoor announced a new two-step service whereby it buys a house, and then shares some of the profits with the seller when it resells it -- an interesting twist on the home-flipping theme, but perhaps not quite enough to explain the stock price doubling!
To the contrary, after cluing in to the DORKs theme Monday, The Wall Street Journal pointed out the curiousness of investors suddenly glomming on to a pair of real estate picks in the midst of a "stagnant U.S. housing market," at the same time as it questioned the wisdom of buying Kohl's stock, which "has been losing ground to competitors for some time and has replaced its chief executive more than once in recent years."
The Journal 's conclusion: "Speculative stocks are having a moment," and "YOLO bets" are back in fashion.
You only live once, so invest in profitable companies while you still can
But here's the problem with such "you only live once" bets in the stock market: They're a good way to kill your portfolio and ensure it won't be able to come back to life.
Benjamin Graham, famed for teaching mega-investor Warren Buffett how to invest, once famously opined, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." And two of the things that the market weighs when determining whether a stock that's gone up can stay up are its profits and its debt.
That's worth keeping in mind before you dive into any of the DORK stocks yourself. Three of these stocks, after all -- Krispy Kreme, Opendoor, and Rocket -- aren't currently earning any profits at all. Kohl's is, and indeed, it earned a pretty respectable $121 million over the past year, and generated nearly that amount ($113 million) of positive free cash flow as well.
Is Kohl's stock a buy?
The Kohl's story gets even better when you examine the company's history, and notice that as recently as 2022, Kohl's was earning well over $900 million in annual profit -- and that analysts who follow Kohl's expect its earnings to at least double to $230 million in just a few years.
The problem with even Kohl's stock, however -- and the reason I worry even this relatively more stable business will probably not be a winner -- is debt. Data from S&P Global Market Intelligence show that, while Kohl's sports a market capitalization of only $1.4 billion, which doesn't look too expensive relative to its $121 million in earnings (the P/E ratio is an unassuming 11.5), Kohl's stock is actually much more expensive than meets the eye. Against cash reserves of only $153 million, Kohl's carries $7.4 billion in debt, pushing its enterprise value up past $8.6 billion -- about 6 times more expensive than its market cap alone would suggest.
So even if analysts are right about Kohl's earning nearly $230 million by, say, 2028, at today's prices, that's still a valuation of more than 37 times the earnings that Kohl's might (or might not) earn a few years from now.
Long story short, even the most promising of the DORK stocks, Kohl's, is probably too risky to invest in. My advice: Don't be a dork. And don't invest in them, either.
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