This has been a year like never before, with the 2019 coronavirus disease pandemic (COVID-19) that has charged an immense physical and financial cost. More than 144,000 Americans died from COVID-19, as of July 23, with more than 20 million people expelled from the workforce.
The pandemic also created the most volatile environment for equities in history, measured by the CBOE volatility index. We witnessed the broad base S&P 500 lose more than a third of its value in a five-week period during the first quarter, and then the benchmark index posted its strongest quarterly earnings in the second quarter since 1998.
Image source: Getty Images.
Among Robinhood’s most popular stocks, these are the three I will never sell
While this volatility can be nauseating at times, it’s generally a great thing for long-term investors. After all, every stock market correction in history has finally been erased by a bull market rally. This means that all significant downside movements in the market must be purchased by long-term investors.
But this volatility has also given rise to what is now known as the “Robinhood Trader”.
Robinhood is an online investment app that has been particularly adept at attracting younger and / or novice investors. While I’m in favor of millennials and Generation Z taking over their financial future and investing their money in the stock market, many of these Robinhood investors lack a long-term mindset. Instead, they are generally behind the hottest stock today. This has left Robinhood’s (that is, its most popular shares held by members) leaderboard riddled with terrible deals.
But among these horrible companies are some stellar stocks that members have picked up (hopefully in the years to come). The following three companies rank among Robinhood’s 25 most popular stocks, and they are current properties of mine that I never intend to sell.
Image source: Getty Images.
Bank of America
Let’s start with my longest tenure, money center giant Bank of America (NYSE: BAC). In Robinhood, BofA is the 16th most popular share, with approximately 342,000 members holding a stake. By context, fewer than 111,000 members owned BofA shares when the year began, making it a very popular addition during the coronavirus fix.
There is no denying that bank stocks are susceptible to weakness during periods of economic contraction or recession, and Bank of America will be no different. The Federal Reserve’s modest monetary policy has lowered interest rates, which will ultimately generate less interest income for large banks. At the same time, uncertainties linked to COVID-19 are likely to increase delinquencies on mortgage, auto, and personal loans.
But these are relatively myopic concerns. The BofA that was hit by settlements and poor credit quality during the financial crisis no longer exists. What you see today is a well-capitalized national bank configured to be successful in the long run.
Among money center banks, Bank of America is often the most interest-sensitive. This means that you will see a huge increase in interest income once the Fed starts raising rates again, which is expected in 2023.
Bank of America has also done explosive work to control its non-interest related expenses, which has played a role in expanding its bottom line. As more of its members switch to digital banking and / or mobile banking on their smartphones, BofA has been able to close some of its physical branches. Compensation is very favorable as digital / mobile transactions are only a fraction of the cost of in-person retail banking.
Given CEO Brian Moynihan’s emphasis on strong capital return programs during periods of economic expansion, I see no reason to sell my stake in Bank of America.
Image source: Facebook.
Although it is a new addition to my portfolio (added during the March crisis), the power of social networks Facebook (NASDAQ: FB) It is another popular Robinhood stock that I have no intention of selling. At Robinhood, Facebook ranks as the 25th most owned stock, with more than 238,000 members owning a slice of the pie. That’s almost double the number of Robinhood stakeholders since early January.
Operating a successful company in the social media space may seem easy, but it is not. Facebook is the model by which other companies try to imitate. At the end of March, Facebook had 2.6 billion monthly active users (MAU), as well as 2.99 billion monthly family active people. This family figure includes other own assets, such as Instagram and WhatsApp. The point is, there is no other social media platform where advertisers can reach nearly 3 billion pairs of eyeballs. That is what makes Facebook and its advertising pricing power so special.
Another reason Facebook is a monster is that it hasn’t even changed its growth engine at full speed. While it does monetize Facebook and Instagram with ads, very little is done regarding monetizing Facebook Messenger and WhatsApp. These are four of the seven most visited social platforms on the planet, and Facebook is really only generating a constant cash flow from two of them. Once Facebook opens the floodgates on WhatsApp and Facebook Messenger, its growth rate and cash flow potential could skyrocket.
I’m also a big fan of what Facebook could do beyond advertising. Don’t get me wrong, advertising should continue to be a fruitful undertaking for Facebook, especially with periods of economic expansion that last considerably longer than periods of economic contraction or recession. But I am excited about the potential of paid solutions or perhaps a premium streaming service that is being built through the Facebook platform.
It is a company with seemingly unlimited potential that would be silly (with a small “f”) to sell.
Image source: Amazon.
Amazon
One last popular Robinhood action I won’t part with is Amazon (NASDAQ: AMZN). Currently, the e-commerce giant is the 12th most-owned share on the Robinhood platform, with more than 393,000 members holding a stake. By context, that’s almost four times the number of Robinhood investors who owned Amazon just five months ago.
While most companies have struggled during the COVID-19 pandemic, Amazon has really benefited, thanks to its online marketplace. According to Bank of America / Merrill Lynch analysts, Amazon controls a staggering 44% of all online sales in the United States. That’s about six times larger than its next closest competitor.
Amazon has been able to use its online domain to force more than 150 million people to enroll in a Prime membership worldwide. The fees Amazon generates from Prime’s help to offset its very slim retail margins and give the company another tool in its arsenal to bring down prices from traditional retailers. Nor does it hurt that the membership model keeps these more than 150 million people locked into the Amazon ecosystem of products and services.
But as I’ve been saying repeatedly for months, the company’s real growth engine is its cloud services segment, Amazon Web Services (AWS). AWS is a set of cloud infrastructure services that primarily helps small and medium-sized businesses build their clouds. With the COVID-19 pandemic pushing more businesses than ever online, AWS should be busier than ever.
Best of all, AWS margins are considerably higher than what Amazon generates from retailers, ads, and streaming content. Therefore, as AWS becomes a larger percentage of the company’s total sales, operating cash flow should skyrocket.
Amazon is the type of growth stock you can set and forget about.
