For more than a year, retail investors have been piling into the stock market. We know this because popular online investing app Robinhood picked up approximately 3 million new members last year. The average age of Robinhood users is only 31…
On one hand, it’s always great to see people putting their money to work in the stock market when time is their greatest ally. The earlier people start investing, the more likely they are to achieve financial freedom.
On the other hand, many of Robinhood’s retail investors lack a long-term mindset. Most are busy chasing momentum/buzzworthy companies, penny stocks, and businesses with highly questionable balance sheets and/or operating results.
Although the following five stocks are extremely popular with Robinhood investors, I’d suggest avoiding them like the plague in May.
To begin with, investors should remain far away from video game and accessories retailer GameStop (NYSE:GME), which has been at the heart of the Reddit-fueled focus on companies ripe for a short squeeze.
Back in January, no publicly traded company had higher short interest, relative to its float, than GameStop. This, along with a short ratio above 6, made it a logical target for retail investors via a short squeeze. However, GameStop’s shares held short have declined significantly since January, all while average daily trading volume has soared. The dynamics that made an epic short squeeze possible four months ago no longer exist.
From an operating standpoint, GameStop was wise to use its share-price run-up to raise $551 million in gross proceeds via an at-the-market share offering. It’s also seen rapid growth in its e-commerce operations.
Nevertheless, sales for the company tumbled 21% last year as comparable-store sales dipped 9.5%, and 12% of all GameStop locations were closed. GameStop has always been built on a brick-and-mortar model that, in the gaming world, is now obsolete. The company will be backpedaling for years to come in an effort to reduce costs and redirect capital to digital gaming. I’m not saying GameStop won’t eventually be successful in this transition so much as pointing out that a $12.3 billion market cap doesn’t accurately reflect the struggles that lie ahead.
Since its initial public offering last month, popular cryptocurrency exchange Coinbase (NASDAQ:COIN) has rocketed up Robinhood’s leaderboard. Given the strong support for digital currencies among young investors, this isn’t a surprise.
The problem is that Coinbase looks to have an operating model that can be easily disrupted. For instance, we’ve seen firsthand what happened to commission fees among traditional brokerage firms. The constant undercutting of commission fees eventually caused brokerages to simply pivot away from these fees as a source of revenue. Coinbase could see its fee structure undercut by new or existing cryptocurrency exchanges.
Coinbase is also highly dependent on the hype and euphoria continuing for Bitcoin and Ethereum. These two coins make up the vast majority of trading revenue for the company. The last time Bitcoin shed 80% of its value — something it’s done three times over the past decade — Coinbase’s total sales declined by…
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