This has been a Wallett an unforgettable and truly wild year. In the first four years, panic and uncertainty associated with the coronavirus pandemic erupted S&P 500 lower by 34% in 33 calendar days. This was the fastest birthmark in history. But it was followed by five months of almost non-stop rally that finally sent the S&P 500 to a fresh high this past week.
While volatility is often a great thing for long-term investors (it lets those with patience pick up big stocks on the cheap), it also has a tendency to bring traders out of the woodwork in the short term.
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In the last quarter, we have been looking at the rise of the Robinhood investor. This connotation has come to symbolize a millennial and / or novice investor who favors short-term trading, penny stocks, and whatever the taste of the week happens. One look at Robinhood’s Leaderboard (or the most widely held stocks on the platform) reveals a landmine of one-day wonders, penny stocks, and downright terrible companies.
On the one hand, I am thrilled to see nothing more than young investors putting their money to work in the stock market. Despite its volatility, the market is the best creator of wealth in the long run, and the earlier people start investing, the more complex can work to their advantage.
But Robinhood does not seem to provide these young and / or novice investors with the tools they need to invest responsibly and wisely. Historically, short-term trading and market times often end badly for the investor.
And these mistakes are not just on the buying side of the equation. In recent weeks, Robinhood investors have paired up their stake in three top-tier companies. If you see maybe five years in the future, they will regret selling these shares.
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Livongo Health
With ownership in the vast majority of Robinhood shares hitting new heights as the stock market grows, one name has remained in the cold for the past two weeks Livongo Health (NASDAQ: LVGO).
Since the first week of August, about 1,500 net Robinhood members have risen to the brink after Livongo announced its intention to merge with Teladoc Health (NYSE: TDOC) in a cash-and-share deal. While there was some initial understanding from investors about the combination, especially with Livongo already turning the corner to profitability and growing at a lightning fast pace, this deal is on track to create a precision medical powerhouse of which Wall Street has never has seen. And investors selling now will be very disappointed.
Livongo Health aims to collect mountains of patient data and, using artificial intelligence, use this data to send tips and nudges to patients with chronic illnesses to elicit long-term behavioral changes. In other words, it helps people with chronic illnesses take better care of themselves and stay on top of their illness.
Livongo is primarily focused on helping diabetics at the moment, and had more than 416,000 members enrolled in diabetes by the end of June. Unfortunately, this represents just 1.2% of all diabetics in the US, leaving Livongo with a sample track to push through this designation. The company also plans to turn to hypertension and weight management, among other chronic conditions.
If Livongo is paired with telemedicine giant Teladoc Health, it’s a match made in heaven. Patients will have easy access to their doctor via Teladoc’s personalized visitation platform, and Livongo will provide personalized care from afar with their monitoring solutions.
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Palo Alto Networks
Another top-tier stock that Robinhood investors will regret selling is cybersecurity company Palo Alto Networks (NYSE: PANW). Although never an extremely popular holding on Robinhood, the company’s net worth has declined by 6.3% in 6 months’ three months.
Why anyone would now consider giving up on Palo Alto Networks is beyond me. The company has a number of specific tailwinds working to its advantage that should allow it to become a network and cloud protection juggernaut.
For one, cybersecurity solutions are no longer an optional service. It does not matter how well or poorly the US economy does, if the size of a company, hackers and robots do not take time off. This means that protecting internal networks and clouds has become a basic emergency service for companies, providing a cash flow predictability that most tech stocks can only dream of.
In addition, the pandemic has completely transformed the traditional office environment and pushed employees into remote workspaces. This places even more emphasis on the need to protect business clouds from external threats.
More specifically for Palo Alto, this is a company that is in the process of transforming itself from a product / services hybrid to one that focuses almost exclusively on subscription services. Subscription-based cybersecurity solutions offer much better margins, less customer shrinkage, and more transparent cash flow, relative to physical firewall products.
Furthermore, Palo Alto has made many bolt-on purchases in the cloud protection space to both expand its portfolio of solutions and appeal to a wider audience of companies. Management is ready to sacrifice the company’s profit in the long run to raise extra share of the cloud protection, and that is a decision that should be fruitful for the company in the long run.
A Starbucks barista. Image source: Starbucks.
Starbucks
Robinhood members are also likely to turn their backs on selling shares of Starbucks (NASDAQ: SBUX). At the end of June, more than 207,200 net Robinhood members had an interest in the coffee giant. But since mid-August, nearly 5,000 net accounts had been heading toward exit.
On the surface, it’s understandable why investors are a little shaky. A few industries have been hit harder by the pandemic than restaurants. Starbucks was forced to close many of its locations in the second quarter, hurting the involvement and the number of transactions it processed. Not surprisingly, sales of similar stores in the second quarter were down 40% from the previous year period.
But another way to look at this data is that it took a pandemic to derail the unstoppable Starbucks. This pandemic will not be with us for long, because society will probably have a vaccine for too long as some form of herd immunity. This suggests that COVID-19 is an opportunity to buy at Starbucks on the cheap, not run for the hills.
Before the pandemic, Starbucks tackled a number of long-term themes to drive growth. It was (and still is) expanding its presence in overseas markets, and has not had much trouble improving digital engagement. With the service industry built on convenience, Starbucks has shifted rewards as a means of driving loyalty, and has expanded options for delivery and mobile pickup.
Its food offerings have also been responsible for higher sales and / or larger size of transaction ticket. This had led CEO Kevin Johnson and his team to look at ways to expand their food menu, with the intention of focusing on guests early in the afternoon.
While the heyday of Starbucks’ high growth may be long gone, it is a brand-name, well-recognized company whose needle is pointing in the right direction.
