No matter how long you've been an investor, there's simply nothing that could have prepared you for what 2020 has offered thus far. In a roughly four-month span, investors have dealt with about a decade's worth of volatility due to the unprecedented coronavirus disease 2019 (COVID-19) pandemic.
Of course, periods of panic and heightened volatility have generally served long-term investors well. That's because every stock market correction in history (save for the current correction) has eventually been erased by a bull market rally. Buying great stocks and hanging onto them for a long period of time is a strategy with a high success rate.
However, panic and volatility can have negative consequences, too. Online investment platform Robinhood, which has been especially successful in courting younger/millennial investors with the lure of commission-free trades and the gift of free stock once you open an account, is one such instance of the dangers that can arise during periods of heightened volatility.
While some of its members have a long-term mindset, the typical "Robinhood investor" is a short-term trader who's usually chasing today's hottest stocks. Since predicting short-term movements can't be done with any accuracy, it's a dangerous game for young investors to be playing.
Worst of all, some of the most popular stocks on the Robinhood platform are absolutely awful companies. Here are five such stocks that retail investors apparently love, but which you should avoid like the plague.
Being brutally honest, the entire electric vehicle (EV) industry, including NIO (NYSE:NIO), Tesla (NASDAQ:TSLA), Workhorse Group, and Tortoise Acquisition, look to be in one massive retail trader-fueled bubble. But none is priced more out of whack than Nikola (NASDAQ:NKLA).
Short-term traders have watched Tesla and NIO defy gravity for weeks, and they simply figure that Nikola and its $20 billion market cap can do the same. After all, Nikola did unveil its Badger EV truck, and initial deposit demand following that unveil was presumed to be strong.
But there's a problem here: Nikola hasn't sold a single EV or fuel-cell vehicle... ever.
The company hopes to begin production of the Badger next year, but it's a veritable certainly that snags and hurdles will arise. Both Tesla and NIO have dealt with surprises of their own, such as NIO abandoning its plan to build a factory in Shanghai to make its own EVs, and Tesla delaying the debut of new models on countless occasions over the past decade. If investors think that Nikola is going from concept to full-bore production at the flip of a switch, they're in for a big surprise. Expect Nikola to lose a substantial amount of money over the next few years.
Millennial-favorite marijuana stock Aurora Cannabis (NYSE:ACB) is another one of those head-scratcher investments. While marijuana stocks have pretty much all performed poorly since the end of the first quarter of 2019, Aurora has been especially awful, with its share price down around 90% over the trailing 16-month period.
At one time, Aurora was expected to lead the world in cannabis output, and it 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 weed, and be able to export a significant amount of this marijuana to medical marijuana-legal foreign markets. Unfortunately, regulatory-based supply concerns have led to bottlenecks in Canada, and very few overseas markets are accepting cannabis imports. As a result, Aurora has shuttered five production facilities, halted construction on two others, and sold a 1-million-square-foot greenhouse.
But the real disaster here is the company's balance sheet. Aurora Cannabis continues to dilute the heck out of its shareholders with at-the-market offerings and all-share acquisitions. It's also lugging around goodwill that accounts for more than half of its total assets. My expectation is that Aurora Cannabis will write down more than half of its total assets.
Robinhood investors have also been obsessed with brand-name stocks as COVID-19 rebound candidates. 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 owned American Airlines. Today this figure is above 659,000 accounts.
Although American Airlines was able to secure bailout funds from the federal government tied to the coronavirus pandemic, there's little argument that it's the worst-of-breed among major airlines. As of its most recent quarterly filing, it had close to $3.6 billion in cash and cash equivalents, but was sporting an unsightly $34.1 billion in total debt. Mind you, this doesn't include a $3.5 billion bond offering dangled in late June that bore a 12% -- yes, 12% -- interest rate. With borrowing rates near record lows, this rate alone tells you everything you need to know about the risk tied to American Airlines' business model.
It's also unclear when, exactly, things will return to normal for the airlines. It could take years before capacity returns to levels seen in 2019. That's worrisome for shareholders, because American was required to halt share buybacks and its dividend as conditions of receiving financial assistance tied to COVID-19. There's really no longer a viable reason to own any major U.S. airline stock, let alone the one with the worst balance sheet.
Robinhood investors have also been infatuated with trying to catch falling knives in the oil and gas industry. The highly volatile driller Callon Petroleum (NYSE:CPE) had fewer than 4,000 accounts holding its stock in early March. Today, more than 110,000 Robinhood members are onboard for the ride. The problem is, that ride may end up breaking hearts and emptying wallets.
In July 2019, Callon announced that it would acquire Carrizo Oil & Gas in an all-stock deal for a $3.2 billion price tag, more than half of which was tied to the assumption of Carrizo's debt. The deal was hailed by both companies as transformational, with the combined entity having increased scale in the Permian Basin and Eagle Ford Shale in Texas, improved cash flow potential, and cost synergies. Then COVID-19 hit, and this bullet-point list of benefits has been thrown out the window.
As of its most recent quarter, Callon Petroleum had nearly $3.3 billion in debt (most of which is due in 2023 or later) and only $14.8 million in cash and cash equivalents. If Q1 2020 was any indication, simply servicing the company's debt is going to cost more than $80 million a year. And, to make matters worse, Callon's creditor's reduced its available line from $2 billion to $1.7 billion, with $1.35 billion already drawn down. Callon looks to be inching its way toward an eventual bankruptcy reorganization, and that'll likely wipe out common stockholders.
Finally -- and maybe the most baffling investment of the group -- Robinhood investors have piled into rental car giant Hertz (NYSE:HTZ). As a reminder, Hertz declared Chapter 11 bankruptcy on May 22, but has seen the number of Robinhood accounts holding its stock explode from around 44,000 to almost 148,000 since the announcement.
Though there has been some speculation that Hertz would issue common stock during its bankruptcy proceedings (a move that the company has now recanted), and that an outside party may be interested in acquiring some or all of its assets, the fact remains that Hertz is bankrupt. While it'll be able to restructure its debt and remain in business during these proceedings, it's very likely that shareholders aren't going to receive anything when Hertz remerges 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 from the horse's mouth. Before Hertz shelved its share offering, a filing from the company with the Securities and Exchange Commission had this to say:
We also expect our stockholders' equity to decrease as we use cash on hand to support our operations in bankruptcy. Consequently, there is a significant risk that the holders of our common stock, including purchasers in this offering, will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.
Avoid Hertz, and every other stock on this list, like the plague.