What a year it has been for Wall Street. Panic and uncertainty surrounding the coronavirus disease 2019 (COVID-19) pandemic sent shares to their fastest and steepest decline in the bear market in history in the first quarter. But records were broken on the return trip as well, with the benchmark S&P 500 take less than five months to regain fresh all-time highs.
While volatility can be scary, it is almost always a welcome sight for long-term investors. This is because it enables patient investors to buy in high quality companies at a perceived discount.
Image Source: Getty Images.
However, volatility also attracts inexperienced investors who hope to make quick money in the stock market. Rarely, if ever, does the short-term strategy of tracking volatility through penny stocks work well.
Take Robinhood online investment platform. Best known for offering free trades and giving a small package share to users when they open accounts, Robinhood has particularly attracted millennials and / or novice investors. A quick look at the leadership of the online platform (that is, the shares most held by members) tells. Although you will find some high quality holdings in the long run, penny stocks and generally bearish companies seem to satisfy many Robinhood investors.
There are three exceptionally popular possessions on Robinhood in particular that can lose 50% or more of their value.
A Tesla Model S is inserted for charging. Image Source: Tesla.
Tesla
Although it is currently possibly the heaviest stock on Wall Street, and it is the eighth most held on Robinhood, maker of electric cars (EV) Tesla (NASDAQ: TSLA) has a surprising rating.
There are reasons for investors to be optimistic about Tesla. The company has exceeded the expectation of delivery in 2020 so far. CEO Elon Musk is highly motivated and confident about the future of the company, and owns roughly 21% of Tesla’s exceptional shares. It certainly does not hurt that Tesla cares for a more affluent group of car buyers who are less likely to change their consumption habits at economic hurdles.
But if you ask me if this group of catalysts is worth a market capitalization of $ 382 billion, my answer is a resounding no.
What we saw from Tesla in 2020 is a complete erasure of what was an unlimited short position in the company. We have also seen short-term investors in the stocks because they are afraid they will miss out. Even the company’s announced 5-for-1 share split has added nearly 50% to its share price. None of these catalysts really have a fundamental impact on Tesla.
Tesla has managed to create a mass-produced EV, and at one point had the advantage of being early in this space. However, the gap in battery performance between Tesla and its peers is narrowing. Numerous well-funded competitors with decades of history behind their brands now produce high-performance EVs. In 2018, Ford announced plans to invest $ 20 billion in EVs by 2022, while General Motors has announced plans this March to spend $ 20 billion on EVs and autonomous cars by 2025. In other words, Tesla’s track will be terribly full.
Emotional investing has proven time and time again that so far it can only carry a company’s valuation, and Tesla’s share price could be significantly lower over the next six to 24 months.
Image source: American Airlines.
American Airlines Group
Another very popular Robinhood stock that could have serious future disadvantages is American Airlines Group (NASDAQ: AAL).
While Tesla has a feel-good story behind its rise, it is unclear why Robinhood investors have hailed American Airlines as the fifth most-held share on the platform. It may look “cheap” simply because its share price returned to an almost eight-year low, but there is currently virtually nothing redeemed about shares of airlines – and especially American Airlines.
The obvious blow to the aviation industry is that we have no idea when passengers will return to the air at pre-pandemic levels. A coronavirus vaccine can encourage travelers to fly again, but it may take years before we have a semblance of normalcy for airlines. That is a major problem for a capital-intensive sector with low margins whose losses simply cannot last long.
Regarding American Airlines, it was able to raise cash through debt offerings. While this eliminates all possibilities of short-term bankruptcy, it has also ballooned the company’s total debt to $ 40 billion. Even if American Airlines continues this pandemic without resorting to reorganization under bankruptcy protection, its interest payments will still consume a substantial portion of its corporate income for a long time to come.
Plus, the financial assistance that American Airlines received as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act no longer means repurchasing shares as dividends for shareholders. The company’s capital return program was arguably the only reason to even consider owning American Airlines, and now it’s gone.
With no guarantee that American Airlines will survive the pandemic itself without seeking bankruptcy protection, I believe it is fair to say that its share may still have a significant disadvantage.
Image Source: Getty Images.
Aurora Cannabis
A 50% decline could also await Canadian licensed marijuana producer Aurora Cannabis (NYSE: ACB). Aurora was actually the most held share on Robinhood for months, until a 1-for-12 reverse split in May apparently liquidated the holdings of all members with less than 12 shares prior to the split. Today, it is the 11th most held company.
I imagine it’s probably a head scratch on why a fast growing marijuana stock would make this list themselves. The answer to that question is twofold.
At the macro level, Canada was widely expected to lead the world with its legalization of weeds for adult use in October 2018. However, Health Canada delayed the launch of high-margin derivatives by a few months. Meanwhile, regulators in selected provinces are struggling to review and issue permits for dispensary stores. These problems mean that Aurora Cannabis has to deal with supply shortages in some provinces and major bottlenecks in others.
On a company-specific basis, Aurora is partly dealing with its problems. A revamped management team has slashed costs and reworked its debt covenant to the point that the company may not be up to standard later this year. To avoid default, Aurora must produce positively adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by fiscal Q1 2021.
However, the cash position of Aurora Cannabis is still a concern, and the company has had a few ways to raise capital beyond selling ordinary shares. Aurora has been a serial diluent of its shareholders for the past four years.
What’s more, the company is slipping about $ 2.42 billion Canadian into goodwill. Aurora will pay roughly for most of its acquisitions and will likely be required to take multiple repayments in the foreseeable future. These limiting costs can be the catalyst that pulls the rug among the company’s shareholders.
