There's been lots of volatility on the markets this year since the outbreak of COVID-19, a lot of which has come as a result of more retail investors getting involved in the markets. The pandemic is keeping people at home, and live sporting events have been canceled, meaning people have been buying and selling shares as a way to generate some excitement in their day-to-day lives. And one particular platform that's been attracting young investors is Robinhood.
Robinhood's attracted investors by offering commission-free trades, making it easier to place small bets on stocks. But that low-cost structure may have helped enable investors to take on high-risk positions, sending speculative investments soaring in the process. Here's why you should generally avoid stocks that are popular on Robinhood.
The top stocks on Robinhood are some of the riskiest investments to hold
Retail investors, especially those on Robinhood, are often more willing than institutional investors to take on significant risk for the chance to rake in a significant profit. There's no better proof of that than what happened with Hertz (HTZG.Q). Despite filing for bankruptcy on May 22, the stock was seeing a lot of activity on Robinhood. Data from Robintrack, which tracks stocks that Robinhood users hold, shows that there were more than 170,000 users who were holding shares of Hertz on June 14. Prior to the bankruptcy announcement, there were fewer than 44,000 Robinhood users who were holding Hertz stock.
Shares of Hertz would go from a low of $0.40 following the bankruptcy announcement to a high of $6.25 on June 8. The stock has since crashed back down to about $1.50.
It's not just bankrupt stocks that retail investors have been chasing. Among Robinhood's 100 most popular stocks are many of the riskiest stocks you can hold. COVID-19 has crippled the airline industry to the point where even Warren Buffett dumped his holdings -- but among Robinhood users, American Airlines and Delta Airlines were both in the top five holdings as of July 1. Cruise lines have also been synonymous with risk, yet both Carnival Cruise Line and Norwegian Cruise Line are among the 15 most popular Robinhood stocks.
Cannabis stocks have been among the most volatile investments to hold during the past year. The Horizons Marijuana Life Sciences ETF is down 65% in phe last 12 months and makes the S&P 500's returns of just 5% look incredible by comparison. And yet, pot stocks aren't hard to find on the Robinhood 100 list.
Stocks that aren't risky are often overpriced
Not every stock that's popular on Robinhood is a bad buy. But many of the ones that are good long-term buys are just downright expensive. As seen from Hertz's astronomical rise in price, hype can play a big factor in determining which stocks will be popular on Robinhood. For example, shares of both Amazon.com and Tesla are both among the top 20 most-held stocks on Robinhood, and both are trading at their all-time highs.
Avoiding popular Robinhood stocks may help keep your portfolio safe
Retail investors have driven a lot of volatility in the markets this year, and if you want to prevent your portfolio from going on a roller-coaster ride, it's probably a good idea to generally avoid stocks that are among the most popular on Robinhood, especially those that rank in the top 20. It could be a sign that they may be about to experience a lot of volatility (if they aren't already). Sticking to unpopular, blue-chip stocks is likely a much safer route to take.
One quality stock that isn't among the most popular list on Robinhood is Medtronic (MDT -0.57%). Fewer than 12,000 Robinhood users are holding shares of the Dividend Aristocrat. Despite paying a dividend yield of 2.5% (more than the S&P 500 average of 2%) and raising its payouts for more than four decades in a row, the healthcare stock hasn't attracted much interest from Robinhood investors. But that makes the boring old dividend stock an attractive buy for income investors -- it's not volatile and not on retail investors' radars.
With profits in nine straight quarters and Medtronic selling various medical products, it's a safe investment to hold for the long term. It's down 19% so far in 2020 while the S&P has fallen by a more modest 4%.
But a lot of that bearishness can likely be attributed to COVID-19. Dealing with the pandemic has been a priority for hospitals and that's resulted in the deferral of many medical procedures, which has hampered Medtronic's sales. The Irish company released its fourth-quarter results on May 21, which showed sales were down 26% year over year. However, Medtronic was still able to post a profit of $646 million, showing a lot of resiliency during a very difficult time for the healthcare industry.
The key takeaway from all this is that investors should avoid chasing stocks that are popular on Robinhood and instead do their own due diligence when deciding on which companies to invest in. Buying a stock because it's hot is an easy way to add a lot of volatility to your portfolio. And odds are that isn't going to be a great strategy as the economy is in a recession and the world is dealing with a pandemic -- which could suggest that another market crash may not be too far away.
Now's a time to exercise caution and stick with safe stocks like Medtronic that can help get your portfolio through this adversity.