At this time last year, the stock market was being whipsawed in a way that investors had never seen before. In roughly one month, the benchmark S&P 500 shed over a third of its value, while the CBOE Volatility Index (a measure of expected volatility in S&P 500 options contracts over the coming 30 days) hit an all-time high…
Yet amid this chaos, millennials and novice investors flocked to invest. We know this because online investing app Robinhood, which is known for its commission-free trades and gifting of free shares of stock to new users, gained approximately 3 million new members last year.
On one hand, it’s fantastic to see young people putting their money to work in the world’s greatest wealth creator. Then again, it’s equally terrifying to see what millennials and novice investors have been buying.
In many instances, they’re chasing penny stocks or momentum plays that are wildly detached from their underlying fundamentals. As of March, the following five Robinhood stocks fit the bill as investments that should be avoided like the plague.
Let’s not beat around the bush: The list of companies that have skyrocketed on the heels of the retail-investor-fueled Reddit rally contains few winners. Video game and accessories retailer GameStop (NYSE:GME) definitely isn’t in the winners column.
GameStop caught fire in January after retail investors on Reddit’s WallStreetBets chatroom agreed to band together to buy shares and out-of-the-money call options in the company. At the time, GameStop was the most short-sold stock of all publicly traded companies, making it the perfect target for a short squeeze. Take a quick glance at the company’s three-month chart and you’ll see that this short squeeze was effective.
The issue is that GameStop isn’t a very good company. It’s been brick-and-mortar based for more than two decades, which is a problem when gaming has shifted to digital platforms. Even with a more-than-quadrupling in e-commerce sales during the holiday season, GameStop’s total sales still declined by 3%. Closing stores to reduce its expenses in an effort to backpedal into profitability isn’t exactly a long-term strategy that’ll pay off for investors.
If GameStop is the Batman of the Reddit-fueled frenzy, movie-theater operator AMC Entertainment (NYSE:AMC) is assuredly its Robin. AMC has been lifted by many of the same young investors that piled into GameStop, with its high short interest acting as a lure. Unfortunately, AMC’s outlook might be even bleaker than GameStop’s.
To begin with, AMC had to raise $917 million at the beginning of the year just to avoid bankruptcy. While it’s possible that the administration of coronavirus vaccines could help life get back to normal sooner than later, this vaccination campaign will depend on the number of coronavirus variants in play, as well as how many Americans choose to get vaccinated. It wouldn’t be a surprise if herd immunity and a return to normal life were pushed back into 2022. AMC may not have the capital to last that long.
Plus, even if AMC Entertainment survives this ordeal, the movie-theater operating model, as we know it, may not. AT&T subsidiary WarnerMedia is releasing all of its new movies in 2021 on HBO Max the same day they’ll hit theaters. Likewise, Walt Disney is debuting some of its releases on Disney+ the same day they’ll hit theaters. It’s possible that convenience will trump the theater experience going forward.
Once the most-held stock on the entire Robinhood platform, Canadian marijuana stock Aurora Cannabis (NYSE:ACB) is now the 18th most-held company. But that’s still far too high for a company that’s continually disappointed its shareholders.
Between June 2014 and the end of 2020, Aurora Cannabis increased its outstanding share count by more than 13,500%! It’s financed more than a dozen acquisitions with its common stock, and its board has regularly approved at-the-market offerings that allow Aurora to raise capital by selling its stock. Even though the company’s market cap has increased 39% over the trailing 12 months, its share price is down 32%. This disparity can be explained by three separate at-the-market programs being executed over the past year.
Aurora Cannabis is also an operational disaster. Part of the problem lies with…
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