It's time to sell frothy speculative stocks with little earnings, Jim Cramer says

A large cohort of red-hot speculative stocks have exploded in tandem with the broader tech boom — but now it’s now time to sell before these companies run out of money, CNBC’s Jim Cramer said.

“So far, you’ve done fabulously if you speculated in these stocks. But the underlying companies most likely need capital and, after a certain time, it won’t be available,” he said. “Warning: that time is now starting, so please sell some of these specs before the companies and the insiders do the same. At a minimum, please take out your cost basis.”

Speculative stocks are risky investments. The companies can see big gains quickly even though they are unprofitable. While these names can generate some revenue, Cramer said, they have little earnings to speak of, and none expected in the near future. While he said he advises investors to have one speculative name in their portfolios, he cautioned against making too many risky investments.

Retail investors have bought up these super speculative stocks as of late, he continued, often using platforms like Robinhood which brought many newcomers to the market.

The recent eruption of speculative names reminds Cramer of the dotcom boom and bust 25 years ago. In 2000, many unprofitable tech companies had sky-high valuations and furiously issued offerings to raise cash. But their cash supply eventually dried up and major investors lost interest in them — leading to a huge crash that devastated the whole market.

Cramer pointed out that popular quantum computing outfit IonQ on Friday offered $2 billion worth of shares, a move that sent the stock plummeting to close down 8.84%. The stock remains up 69.14% year-to-date. This kind of equity offering is likely the first of many to come, Cramer suggested.

Quantum computing companies are largely considered speculative because they rely on new quantum technology that is still being developed and does not yet have practical use cases or the ability to yield solid returns.

Cramer said he expects the dotcom dynamic will “play out again with so many of these red-hot speculative names unless they cool off.” But he said he hopes any losses from these frothy companies can be contained and won’t drag down the rest of the market.

In some ways, he continued, the market froth is “right on time.” Wall Street has just reached the third anniversary of this decade’s bull market, Cramer added, and the continued success has brought about a “time of complacency and speculation.”

“Sooner or later, though, someone needs to pay the piper here, whether it be nuclear or bitcoin derivatives or quantum computing or even some of the unprofitable data center adjacencies,” he said.