This year has truly been a tale of two markets.
During the first quarter, the benchmark S&P 500 was pummeled, losing as much as 34% of its value in a span of 33 calendar days. The coronavirus disease 2019 (COVID-19) pandemic brought an abrupt end to the longest period of economic expansion in recorded U.S. history.
But over the past four months, equities have been virtually unstoppable. The technology-heavy Nasdaq Composite has rocketed to more than two dozen fresh all-time highs, whereas the S&P 500 has recouped pretty much all of its year-to-date losses.
While this volatility is often a great opportunity for long-term investors to buy game-changing companies on the cheap, it's also given rise to the "Robinhood trader."
Robinhood investors are finally evicting some bad stocks out of their portfolios
Robinhood is an online investing platform known for offering commission-free trades and free shares of a random stock if you sign up and deposit money into an account. More specifically, Robinhood has attracted a younger and more novice group of members, many of whom don't understand the benefits of long-term investing. As a result, the typical Robinhood trader is viewed as a very short-term investor chasing today's hottest stocks or trends.
Furthermore, Robinhood, like most online brokerages, offers their users the opportunity to utilize margin to leverage their buying power. This can make for supersized gains if an investor is correct, and exacerbate losses if incorrect. Suffice it to say that, historically, chasing a hot trend, using margin, and thinking short-term rarely works out for very long.
With many of its members unable to focus beyond the next tick on a one-day chart, Robinhood's leaderboard (i.e., its most-held stocks) looks like a minefield of awful companies. The good news I can report is that, over the past 30 days, three terrible stocks have started to get the heave-ho out of Robinhood investors' portfolios.
Because of COVID-19, there hasn't been a hotter industry of late than vaccine developers. Few have delivered more impressive returns than Inovio Pharmaceuticals (INO 6.70%), which is up more than 600% year to date, as of this past weekend. Unfortunately, this hot stock brings little substance to the table for shareholders.
On a broader basis, few investors have done well by chasing pumped-up vaccine developers homed in on the next big pandemic threat. Before COVID-19, the vast majority of drugmakers focused on finding therapies to treat Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, the avian bird flu, Zika, and Ebola had fleeting stock gains. The clinical success rate of new therapeutics isn't great, and the sheer number of drug developers aiming to make a vaccine at the moment makes it unlikely that any one company will reap the lion's share of the reward of developing a COVID-19 vaccine.
On a more company-specific level, Inovio has little to show for itself after more than 40 years. Despite reporting positive early stage clinical data on INO-4800, its COVID-19 vaccine candidate, the company still doesn't have a U.S. Food and Drug Administration approval under its belt, and its primary means of raising capital has been through share issuances. A 43-million-share at-the-market offering earlier this year served to line the company's coffers at the expense of shareholders.
Over the past 30 days, no company has been sold out of Robinhood investors' portfolios more than Inovio Pharmaceuticals. Even short-term traders appear to be catching on to Inovio's long history of failing to produce.
Another popular company that's finally starting to get the boot is Canadian marijuana stock Aurora Cannabis (ACB -6.20%). Even though Aurora remains one of the most-held stocks on the Robinhood platform, more than 17,300 net members have sold out of the company over the trailing 30 days.
Operationally, Aurora is attempting to backpedal its way to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It's halted construction on two of its largest cultivation facilities, sold a 1-million-square-foot greenhouse that it never took the time to retrofit for pot production, and has closed five of its smaller grow farms. Further, multiple rounds of layoffs were enacted, all in an effort to reduce selling, general, and administrative expenses.
While these operational moves were long overdue, they don't resolve all of Aurora Cannabis' problems. Similar to Inovio, Aurora's primary means of accessing capital has been to sell its common stock. Taking into account the company's 1-for-12 reverse split that was enacted on May 11 to avoid delisting from the New York Stock Exchange, Aurora's share count has ballooned from 1.3 million to at least 112 million in six years.
Aurora Cannabis is also lugging around $2.42 billion Canadian in goodwill, accounting for 51% of its total assets. There's a real chance that more than half of Aurora's total assets need to be written down. It would certainly appear that some Robinhood investors are starting to wise up on Aurora Cannabis.
Car rental company Hertz (HTZG.Q) is another head-scratcher of a holding that, for a period of time, has been especially popular among Robinhood members. I say "head-scratcher" because Hertz's popularity spiked after the company filed for Chapter 11 bankruptcy protection in May. But over the trailing 30 days, more than 16,400 net members have closed out their positions.
Initially, Hertz's stock soared on the prospect of the company issuing approximately $500 million worth of common stock during its bankruptcy proceedings. Then, rumors began to swirl that bidders might be interested in scooping up bits and pieces of Hertz, including its fleet of vehicles. However, neither of these catalysts came to fruition.
What shareholders are left with is a company that's going to need to sell approximately 182,000 cars in the coming months to help reduce its outstanding debt and satisfy the company's bondholders. Even though Hertz looks to be on track to emerge from bankruptcy as a leaner company, it's unclear whether shareholders will have any equity stake left. Even the company stated in a Securities and Exchange Commission filing that its stock could well be worthless.
As the icing on the cake, Hertz is facing a possible delisting from the New York Stock Exchange. Put plainly, there isn't a single good reason to be a Hertz shareholder right now.