If you thought investing during the financial crisis was a wild ride, 2020 has almost certainly altered your perception. The coronavirus disease 2019 (COVID-19) pandemic spiraled equities into the fastest and steepest bear market in history during the first quarter. However, the subsequent four-month period has featured one of the strongest rallies in more than two decades.
For long-term investors, this heightened volatility has offered an opportunity to buy great companies at a discounted price. But at the same time, it's also brought a bunch of risk-taking short-term traders out of the woodwork and given rise to what's become known as the "Robinhood investor."
Despite their love of volatility, Robinhood investors have taken a liking to three mature businesses
Robinhood is an online investing platform known for its commission-free trades and its giveaway of free shares of stock when a person signs up. It's an especially popular app with young and novice investors.
While it's excellent that a younger generation of people is interested in taking charge of their financial future, Robinhood hasn't given these folks access to the knowledge they need to be successful investors. Rather than seeking out game-changing businesses and buying stakes in companies for the long run, the typical Robinhood investor is viewed as a retail trader who seeks to jump in and out of the hottest stocks of the week. Since timing the market isn't something that can be done with any accuracy over the long run, this method of investing has a very low probability of success.
But among the news-driven volatility associated with Robinhood's leaderboard (i.e., its most-held stocks by members), there are a small handful of standouts -- in particular, three surprisingly popular Robinhood stocks that aren't volatile and are, for lack of a better word, stodgy businesses.
Perhaps the biggest surprise of all is that it's not some flashy tech stock or some high-flying biotech that's the most-held company on Robinhood's platform. It's automaker Ford (F -0.91%), which was held by almost 937,000 members as of this past weekend. For context, ownership in Ford, by number of Robinhood members, has more than tripled over the trailing six months.
Why Ford? It's tough to say, but I have a couple of guesses. For one, a share could be had for only $6.88 as of this past weekend. For young and/or novice investors, the psychology of owning more shares of stock and seeing a low share price as more likely to double in value than a perceived-to-be "high" share price can come into play.
Ford is also a brand-name company that most investors are likely familiar with. Though buying brands you use or are familiar with isn't always the best investing strategy, it is important to understand the positive and negative catalysts associated with an investment.
Though it's perceived as a value among auto stocks, I'm not entirely certain why Ford is as popular as it's become -- unless it's one of the free stocks dispersed by Robinhood upon signing up. Ford is facing a huge uphill sales battle due to COVID-19, and industrywide auto sales peaked well before the pandemic struck. Lower prices at the pump could fuel higher-margin F-Series and SUV sales, but it looks as if it'll be years before Ford is back to its 2019 sales level. All the while, the company's debt will have grown due to the pandemic.
All in all, it's a surprising, if not head-scratching, top pick by Robinhood investors.
Another surprise can be found with conglomerate General Electric (GE 0.24%), which is the second-most-held stock on the Robinhood platform. Almost 840,000 members owned a stake in GE as of this past weekend, which is triple the number of Robinhood investors that held shares one year ago.
Why General Electric? Not to sound like a broken record, but it's probably the same three reasons Robinhood investors have bought into the Ford thesis. GE sports a reasonably low share price ($6.86), is a brand-name company that a lot of folks have probably heard of before, and might be one of the companies parsed out by the platform to folks who open an account.
But just because a company is easily recognizable doesn't mean it's a good investment. While the case could certainly be made that General Electric's transformation is a positive for investors, it might take a long time before real dividends become apparent.
For example, my Foolish colleague John Bromels recently pointed out that what few operating segments remain have faced serious challenges. Though GE divested a number of noncore assets and reduced its debt, it's now left with a larger reliance on its aviation unit, which is no guarantee to rebound anytime soon due to COVID-19. In fact, it could be argued that a glut of commercial aircraft could dampen the need for jet engines for years to come.
Likewise, it's not as if General Electric's turbine business has a rosy outlook. With lending rates near historic lows, utilities are incented now more than ever to undertake renewable energy projects. That could bode poorly for turbine demand at traditional natural gas and coal-fired utility plants.
All things considered, the popularity of GE on Robinhood is shocking.
Robinhood investors might love chasing the next hot stock, but they also, apparently, love to get their hands on shares of beverage giant Coca-Cola (KO 0.32%). Coke is the 34th-most-held stock on the platform, with more than 215,000 stakeholders. That's almost a 400% increase from the number of Coca-Cola shareholders on Robinhood at this time last year.
Why Coca-Cola? This time it has nothing to do with share price. Instead, my suspicion is that Coca-Cola's branding is what makes it popular among Robinhood investors. Coca-Cola is one of the most recognized brands in the world, and the company has engaged all sorts of platforms to reach consumers. This includes TV and digital advertising, tie-ins with holidays (e.g., Christmas), and utilizing well-recognized celebrities as ambassadors.
Unlike Ford and GE, which both offer more questions than answers, Coca-Cola has all the hallmarks of a solid investment. The company brings new meaning to the words "geographically diverse," with a presence in all but two countries worldwide (North Korea and Cuba). Yes, Coke has faced some very short-term challenges due to COVID-19, but its branding power simply can't be topped among beverage companies.
In addition to geographic diversity, Coca-Cola has hundreds of beverage brands worldwide, including more than 20 that generate in excess of $1 billion a year. The company recently stated its intention to narrow its beverage portfolio a bit to lower its expenses, as well as to allow it to focus on its top-selling brands.
Coca-Cola is the type of stock conservative long-term investors can set and forget about. That's what makes it such a surprisingly popular stock for Robinhood investors.