No matter how long you have been an investor, there is simply nothing that could have prepared you for what 2020 has offered so far. In a span of about four months, investors have grappled with volatility of about a decade due to the unprecedented 2019 coronavirus disease pandemic (COVID-19).
Of course, periods of panic and increased volatility have generally served investors well in the long term. This is because every stock market correction in history (except for the current correction) has been erased by a bull market rally. Buying large stocks and holding them over a long period of time is a strategy with a high success rate.
Image source: Getty Images.
However, panic and volatility can also have negative consequences. The Robinhood online investment platform, which has been especially successful in wooing younger / millennial investors with the lure of commission-free trading and the gift of free stock once you open an account, is one such example of dangers that can arise during periods of increased volatility.
While some of its members have a long-term mindset, the typical “Robinhood Investor” is a short-term trader who generally chases today’s most popular stocks. Since predicting short-term movements cannot be done accurately, it is a dangerous game for young investors.
Worst of all, some of the most popular stocks on the Robinhood platform are absolutely horrible companies. Here are five such stocks that retail investors apparently love, but should avoid like the plague.
The Nikola Badger electric truck. Image source: Nikola.
Nikola
Being brutally honest, the entire electric vehicle (EV) industry, including NIO (NYSE: NIO), Tesla (NASDAQ: TSLA), Group of workhorsesand Turtle acquisitionIt appears to be in a massive bubble fueled by retailers. But none are priced more out of control than Nikola (NASDAQ: NKLA).
Short-term traders have seen Tesla and NIO defy gravity for weeks, and simply realize that Nikola and its $ 20 billion market capitalization can do the same. After all, Nikola unveiled his Badger EV truck, and the initial demand for deposits after that presentation was supposed to be strong.
But there is a problem here: Nikola has not sold a single EV or fuel cell vehicle … never.
The company hopes to start production of the Badger next year, but it is true that there will be drawbacks and obstacles. Both Tesla and NIO have grappled with their own surprises, as NIO abandoned its plan to build a factory in Shanghai to make its own electric vehicles, and Tesla delayed the debut of new models countless times over the past decade. If investors think Nikola is moving from concept to full production at the flip of a switch, they will be surprised. Expect Nikola to lose a substantial amount of money in the years to come.
Image source: Getty Images.
Cannabis Aurora
Millennium Favorite Marijuana Stock Cannabis Aurora (NYSE: ACB) It’s another one of those head scratching investments. While marijuana stocks have performed pretty poorly since the end of the first quarter of 2019, Aurora has been especially horrible, with its stock price around 90% during the final 16-month period.
At one point, Aurora was expected to lead the world in cannabis production, and had access to two dozen markets outside of Canada. This suggested that it would use economies of scale to produce very low-cost, high-quality marijuana, and would be able to export a significant amount of this marijuana to legal foreign markets for medical marijuana. Unfortunately, regulatory-based supply concerns have led to bottlenecks in Canada, and very few foreign markets accept cannabis imports. As a result, Aurora closed five production facilities, halted construction of two others, and sold a 1 million square foot greenhouse.
But the real disaster here is the bottom line of the company. Aurora Cannabis continues to dilute its shareholders with market offers and stock acquisitions. It is also dragging goodwill that represents more than half of its total assets. My expectation is that Aurora Cannabis will write down more than half of its total assets.
Image source: American Airlines
American airlines
Robinhood investors have also been obsessed with brand equity as rebound candidates for COVID-19. Perhaps none fits this thesis more than American Airlines Group (NASDAQ: AAL). Before the stock market fell off a cliff in late February, approximately 14,000 Robinhood accounts were owned by American Airlines. Today this figure is over 659,000 accounts.
Although American Airlines was able to obtain bailout funds from the federal government linked to the coronavirus pandemic, there is little argument that it is the worst of the major airlines. As of her most recent quarterly filing, she had close to $ 3.6 billion in cash and cash equivalents, but she had total unsightly debt of $ 34.1 billion. Of course, this does not include a bond offer of $ 3.5 billion at the end of June that had 12% – yes, 12% — interest rate. With loan rates close to record lows, this rate alone tells you everything you need to know about risk linked to the American Airlines business model.
It’s also unclear when, exactly, things will return to normal for airlines. It could be years before capacity returns to levels seen in 2019. That is troubling for shareholders, because American was required to suspend the share buyback and its dividend as conditions for receiving financial assistance linked to COVID-19. There really is no longer a viable reason to own any major US airline stock, let alone the one with the worst overall balance.
Image source: Getty Images.
Callon Petroleum
Robinhood investors have also fallen in love with trying to catch falling knives in the oil and gas industry. The highly volatile perforator Callon Petroleum (NYSE: CPE) He had less than 4,000 accounts with his shares in early March. Today, more than 110,000 Robinhood members are on board for the voyage. The problem is that that trip can end up breaking hearts and emptying wallets.
In July 2019, Callon announced that it would acquire Carrizo Oil & Gas in a $ 3.2 billion all-stock deal, more than half of which was tied to Carrizo’s assumption of debt. The deal was hailed by both companies as a transformer, and the combined entity scaled up in the Permian Basin and Eagle Ford Shale in Texas, improved cash flow potential and cost synergies. Then it hit COVID-19, and this list of benefits was thrown out the window.
As of its last quarter, Callon Petroleum had debt of nearly $ 3.3 billion (most of which is due in 2023 or later) and only $ 14.8 million in cash and cash equivalents. If the first quarter of 2020 was an indication, simply paying off the company’s debt will cost more than $ 80 million a year. And, to make matters worse, Callon’s creditors reduced their available line from $ 2 billion to $ 1.7 billion, with $ 1.35 billion already withdrawn. Callon appears to be slowly moving toward an eventual bankruptcy reorganization, and that will likely eliminate common shareholders.
Image source: Getty Images.
Hertz
Finally, and perhaps the group’s most baffling investment, Robinhood investors have huddled in the car rental giant. Hertz (NYSE: HTZ). As a reminder, Hertz filed for Chapter 11 bankruptcy on May 22, but has seen the number of Robinhood accounts explode with his shares from around 44,000 to nearly 148,000 since the announcement.
Although it has been speculated that Hertz would issue ordinary shares during its bankruptcy proceedings (a move that the company has now withdrawn), and that an outside party may be interested in acquiring some or all of its assets, the fact is that Hertz is bankrupt. While you will be able to restructure your debt and stay in business during these procedures, it is highly likely that shareholders will receive nothing when Hertz emerges from bankruptcy. In other words, some 148,000 Robinhood investors could see their Hertz investment go to $ 0.
And if you don’t believe me, take it straight out of the horse’s mouth. Before Hertz filed its share offering, a company filing with the Securities and Exchange Commission had this to say:
We also expect our shareholders’ capital to decrease as we use available cash to support our bankruptcy operations. Accordingly, there is a significant risk that the holders of our common shares, including the buyers of this offer, will not receive any recovery under the Chapter 11 Cases and that our common shares are worthless.
Avoid Hertz and any other actions on this list, like the plague.
