The Robinhood stock-trading service is a great resource for novice investors because of its low fees and user-friendly mobile app. But if you are new to the stock market, it can be hard to tell the good companies from the bad ones. That can lead to novice investors easily falling victim to money-burning stocks that will blow up their portfolio.
One way novice investors look for good stock investing bets is to see what stocks are the most popular and Robinhood helps in that effort by providing lists of the most widely held stocks among its users. There are plenty of good companies on that list and a few that are not so good (and not much to differentiate them within the app).
Here are two extremely risky stocks that are very popular on Robinhood. The first stock is Eastman Kodak (KODK -2.14%), a once-bankrupt film company trying to pivot toward pharmaceuticals production. And the second stock is AMC Entertainment (AMC -2.95%), a movie theater operator that might not survive the coronavirus pandemic because of its troublesome business model. Let's go over what exactly makes these companies terrible investments.
Image source: Getty Images.
1. Eastman Kodak
Eastman Kodak doesn't have a track record of success. The company filed for Chapter 11 bankruptcy protection in 2012 after failing to adapt to the migration toward digital cameras (a product it helped invent). After restructuring, Kodak pivoted to digital image printing and what can best be described as a harebrained cryptocurrency scheme. Now, it wants to use its vast, underutilized manufacturing footprint to make key starting materials for pharmaceutical products.
The good news is that Kodak may receive a $765 million loan through the Defense Production Act to produce generic drug ingredients to help with the fight against COVID-19. The bad news is that the company looks unlikely to properly execute on this new opportunity because of its poor management and weak financial condition.
The loan has also been put on hold due to allegations of wrongdoing. The SEC has launched a probe into whether Kodak's management violated insider trading laws because of unusual trading activity before the loan deal was announced.
This is not the first time Kodak has tried (and failed) to get into the drug business. In 1988, the film company purchased Sterling-Winthrop Pharmaceuticals for $5.1 billion -- only to sell it components off six years later to Sanofi and SmithKline Beecham (now GlaxoSmithKline) for $1.68 billion and $2.93 billion respectively. That ends up being $500 million less than what Kodak initially paid for the business, and it suggests there may have been some value destruction and mismanagement involved.
In 2019, Kodak reported substantial doubt about its ability to continue as a going concern due to cash flow challenges, and the company generated a net loss of $111 million in the first quarter of fiscal 2020. Many Robinhood investors enjoy taking risks, but in the case of Eastman Kodak, the risks seem to outweigh the potential rewards.
2. AMC Entertainment
The movie theater industry is in secular decline, and the coronavirus pandemic has accelerated this trend -- putting movie theater operators like AMC Entertainment at serious risk of bankruptcy. The stock has already fallen 62% year to date, and it faces more downside as studios move important releases to their streaming platforms.
Most recently, Walt Disney (DIS -0.06%) announced plans to release the much-anticipated Mulan on a premium version of Disney+ for $30 on Sept. 4. While this is a steep price point, it is competing against an average theater ticket cost of $9.26 -- and people usually don't go to the movies alone. On top of that, Disney can make up for lower sales value through its higher profit share (Industry sources say studios get about 60% of the cut for a theatrical release, but the studio would get about 100% of revenue from a release on its own service).
If Mulan's streaming premiere is successful, that could open the door for more studios to skip theaters altogether and release their movies via in-house streaming platforms instead.
AMC reported second-quarter earnings on Aug. 6, and the results were a disaster. Revenue fell 99%, from $1.5 billion to $18.9 million, and the company generated a net loss of $561 million, which comes out to $5.44 per share. With a stock price of $4.14 at the time of writing, AMC Entertainment lost more than the value of its entire market cap in a single quarter -- a fact that highlights the dangers of holding this stock.
