This has been an unforgettable and truly wild year on Wall Street. During the first quarter, panic and uncertainty tied to the coronavirus pandemic pushed the broad-based S&P 500 lower by 34% in 33 calendar days. This was the quickest bear market decline in history. But it was followed by five months of almost nonstop rallying that ultimately sent the S&P 500 to a fresh all-time high this past week.
While volatility is often a great thing for long-term investors (it allows those with patience to pick up great stocks on the cheap), it also has a tendency to bring short-term traders out of the woodwork.
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In recent quarters, we've witnessed 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 flavor of the week happens to be. One look at Robinhood's leaderboard (i.e., the most-held stocks on the platform) reveals a land mine of one-day wonders, penny stocks, and downright awful companies.
On one hand, nothing thrills me more than to see young investors putting their money to work in the stock market. Despite its volatility, the market is the best long-term creator of wealth, and the earlier people start investing, the more compounding can work in their favor.
But Robinhood doesn't appear to be providing these young and/or novice investors with the tools they need to invest responsibly and wisely. Historically speaking, short-term trading and market timing often end poorly for the investor.
And these mistakes aren't just on the buy side of the equation. In recent weeks, Robinhood investors have pared down their stakes in three top-tier companies. Looking perhaps five years into the future, they are going to regret selling these stocks.
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Livongo Health
With ownership in the vast majority of Robinhood stocks hitting new all-time highs as the stock market surges, one name that's been left out in the cold over the past two weeks is healthcare solutions provider Livongo Health (LVGO).
Since the first week of August, approximately 1,500 net Robinhood members have headed for the exit after Livongo announced its intent to merge with Teladoc Health (TDOC -4.78%) in a cash-and-stock deal. Although there was some initial apprehension from investors regarding the combination, especially with Livongo already turning the corner to profitability and growing at a lightning-quick pace, this deal is on track to create a precision-medicine powerhouse the likes of which Wall Street has never seen. And investors who sell now are going to be sorely disappointed.
Livongo Health aims to aggregate mountains of patient data and, with the help of artificial intelligence, use this data to send tips and nudges to patients with chronic illnesses to elicit long-lasting behavioral changes. In other words, it's helping people with chronic diseases 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 diabetes members enrolled at the end of June. Amazingly, this represents just 1.2% of all diabetics in the U.S., leaving Livongo a monster runway to further penetrate this indication. The company also plans to pivot to hypertension and weight management, among other chronic conditions.
When Livongo is paired with telemedicine giant Teladoc Health, it's a match made in heaven. Patients will have convenient access to their doctor via Teladoc's personalized visit platform, and Livongo will provide personalized care from afar with its monitoring solutions.
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Palo Alto Networks
Another top-tier stock that Robinhood investors are going to regret selling is cybersecurity company Palo Alto Networks (PANW -0.86%). While never an extremely popular holding on Robinhood, the company's net ownership has declined by 6.3% in just shy of three months.
Why anyone would consider giving up on Palo Alto Networks now is beyond me. The company has a number of specific tailwinds working in its favor that should allow it to become a network- and cloud-protection juggernaut.
For one, cybersecurity solutions are no longer an optional service. No matter how well or poorly the U.S. economy is performing, or the size of a business, hackers and robots don't take time off. This means protecting internal networks and clouds has become a basic-need service for businesses, which provides a predictability to cash flow that most tech stocks can only dream of.
Additionally, the pandemic has completely transformed the traditional office environment and pushed employees into remote work spaces. This is placing even more emphasis on the need to protect enterprise clouds from external threats.
More specific to Palo Alto, this is a company that's in the process of reshaping itself from a product/service hybrid to one that almost exclusively focuses on subscription services. Subscription-based cybersecurity solutions offer much better margins, less customer churn, and more-transparent cash flow, relative to physical firewall products.
Furthermore, Palo Alto has been making numerous bolt-on acquisitions in the cloud protection space to both broaden its portfolio of solutions and appeal to a broader audience of businesses. Management is willing to sacrifice the company's near-term operating profit in order to gobble up additional cloud-protection market share, and that's a decision that should prove fruitful for the company over the long run.
A Starbucks barista. Image source: Starbucks.
Starbucks
Robinhood members are also probably going to be kicking themselves over selling shares of Starbucks (SBUX 0.18%). In late June, more than 207,200 net Robinhood members owned a stake in the coffee giant. But as of mid-August, nearly 5,000 net accounts had headed for the exit.
On the surface, it's understandable why investors are a bit skittish. Few industries have been hit harder by the pandemic than restaurants. Starbucks was forced to close many of its locations during the second quarter, which hurt engagement and the number of transactions it processed. Not surprisingly, second-quarter comparable-store sales were down a jaw-dropping 40% from the prior-year period.
But another way to look at this data is that it took a pandemic to derail the unstoppable Starbucks. This pandemic isn't going to be with us long term, as society will presumably either have a vaccine or some form of herd immunity before too long. This suggests that COVID-19 is an opportunity to buy into Starbucks on the cheap, not to run for the hills.
Before the pandemic, Starbucks was hitting on a number of long-term themes to drive growth. It was (and still is) expanding its presence in overseas markets, and has had little trouble improving digital engagement. With the service industry built on convenience, Starbucks has pushed rewards as a means of driving loyalty, and has expanded delivery and mobile pickup options.
Its food offerings have also been responsible for higher sales and/or larger transaction ticket size. This had led CEO Kevin Johnson and his team to look at ways to expand their food menu, with the intent of focusing on guests in the early afternoon.
Though Starbucks' high-growth heyday may be long gone, it's a brand-name, well-recognized company whose needle is pointed in the right direction.
