For more than a year, we’ve watched an interesting phenomenon take shape on Wall Street. The more volatile things have been for equities, the more enticing it’s been to young and novice investors. How do we know this, you ask? Just take a closer look at the success of online investing app Robinhood…
Robinhood, which is known for its commission-free trades and gifting of free shares of stock to new members, gained in the neighborhood of 3 million new users in 2020. The thing is, the average age of its user base is only 31. It’s become an investing destination that young and/or novice retail investors have flocked to.
In one respect, it’s fantastic to see young people putting their money to work in a proven wealth creator (the stock market). Conversely, it’s terrifying to see what they’ve been buying. With many focused on the short term and looking to get rich quickly, Robinhood’s leaderboard (the 100 most-held stocks on the platform) is packed with momentum plays, penny stocks, and other undesirable companies.
Among these most-held stocks are four extremely popular companies that I wouldn’t buy, even with free money.
Let’s begin with the fourth most-held stock on the entire platform, Canadian marijuana stock Sundial Growers (NASDAQ:SNDL). Sundial was caught up in the Reddit frenzy in late January and early February and also happens to be a penny stock, which creates double the attraction for young investors. Unfortunately, management appears hell-bent on diluting the daylights out of its shareholders, and the company’s operating performance has, thus far, been poor.
In an effort to clean up its balance sheet, Sundial has undertaken numerous share offerings and debt-to-equity swaps, as well as had warrants executed. All told, in the five-month span between Oct. 1, 2020, and Feb. 28, 2021, Sundial Growers’ outstanding share count more than tripled to 1.66 billion.
Worse yet, Sundial recently filed to sell up to $800 million worth of its stock via at-the-market offerings. Based on its closing price of $0.852 on April 15, this could add another 939 million shares to the outstanding count, if fully executed. This enormous share count will make it impossible for the company to generate meaningful earnings per share and could make it difficult to remain listed on the Nasdaq exchange without enacting a reverse split.
The last straw is that Sundial is still years away from becoming profitable or even hitting $100 million in sales. It has no business being valued at $1.42 billion.
American Airlines Group
I will never understand the fascination Robinhood investors have with airline stocks. It’s an industry with exceptionally high capital inputs that, even under ideal conditions, generates mediocre margins. But there are even more reasons why the 13th most-held stock on the platform, American Airlines Group (NASDAQ:AAL), is unworthy of my money.
Although it’s been a popular reopening trade, American Airlines’ balance sheet is the train wreck of the airline industry. It’s lugging around $41 billion in debt and has less than $6.9 billion in cash. It was forced to raise a lot of capital during the pandemic to ride out the uncertainty, and it made a poor decision to modernize its fleet in 2018, resulting in the company taking on debt long before it was necessary to do so.
Also, ramping the company’s…
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