For investors, volatility has been the name of the game throughout much of 2020. The panic and uncertainty brought on by the coronavirus disease 2019 (COVID-19) pandemic cost the benchmark S&P 500 34% of its value in a stretch of less than five weeks. Subsequently, it took less than five months for the broad-based index to essentially gain everything it had lost back.
This volatility is a blessing in disguise for long-term investors, as it allows them to scoop up innovative businesses on the cheap. But for short-term traders or novice investors who don't know any better, volatility can prove tempting and dangerous.
In recent months, we've watched the "Robinhood investor" take shape. Robinhood is an online investing platform best known for its commission-free trades and the gift of free stock when signing up. It's also a service that's incredibly adept at attracting millennial and/or novice investors.
While encouraging younger investors to put their money to work in the stock market is fantastic since compounding will work to their advantage over time, Robinhood might not setting up its millennial and novice investors for success. Rather, many have been chasing Wall Street's flavor of the week or penny stocks, littering Robinhood's leaderboard (i.e., its most widely owned companies) with awful stocks. Historically, this is not an investment strategy that works for long periods of time, if at all.
Worse yet, some of the most popular Robinhood stocks look as if they could well be headed toward $0. Here are three very popular Robinhood stocks with the potential to wipe out investors.
What better way to begin than with a rental car giant that filed for Chapter 11 bankruptcy protection in May, but has seen ownership on Robinhood skyrocket: Hertz Global (HTZG.Q).
Hertz was pushed into bankruptcy by its crippling debt load and a historic drop-off in travel-related demand tied to COVID-19. Hertz's stock initially cratered on the news, but somehow managed to rally almost 900% in the two weeks that followed its bankruptcy filing. The possibility of Hertz issuing up to $500 million in common stock during its bankruptcy proceedings, or of a suitor taking over Hertz, proved enough to send its share price soaring. On Robinhood, the number of accounts holding Hertz jumped from 1,190 at the end of February to over 170,000 by mid-June.
However, none of these pie-in-the-sky wishes came to fruition. Hertz was forced to scrap its share issuance plan after the Securities and Exchange Commission probed for more information, and no buyers emerged for the company. Instead, Hertz is being forced to sell off more than 182,000 vehicles from its fleet to meet debt obligations throughout the remainder of the year.
The problem is that Hertz's debt load is so crippling that the bankruptcy process, coupled with the likelihood of delisting from the New York Stock Exchange, could wipe out shareholders. Personally, I'd be surprised if Hertz's share price doesn't approach $0.
Last month, I didn't shy away from calling Greek petroleum shipping company TOP Ships (TOPS -2.25%) "the absolute worst stock that Robinhood investors love." Not only would I stand by that statement today, but I'd double down on it.
For many years, TOP Ships has relied on common stock issuances to put cash in its coffers and fund the purchase of shipping vessels and its day-to-day operations. That's because the heyday for petroleum shipping companies occurred prior to the Great Recession. Most shipping companies, including TOP Ships, have been struggling to avoid an industrywide vessel glut for a decade.
But TOP Ships is an extreme case. The company has reverse split its stock on 10 occasions over the past 12 1/2 years, including seven reverse splits since May 2017. The company's management team has a habit of generating cash by selling stock and ballooning its shares outstanding. These steps drive down the company's share price to mere pennies, prompting the company to enact a reverse split to avoid delisting from the Nasdaq stock market. Laughably, the company's reverse-split-adjusted all-time high, set back in 2004, is now $4,562,459,852.800.00 a share. That's $4.56 trillion a share!
Since announcing its intent to reverse split on Aug. 7 (the split took effect on Aug. 10), TOP Ships has shed nearly 50% of its value and is once again in danger of falling below the $1 minimum share price required for continued listing on the Nasdaq.
Despite this, TOP Ships is the 51st-most-held stock on Robinhood. Even if the company doesn't go bankrupt, management's persistent dilution and penchant for reverse splits could completely wipe out shareholders.
A quick glance at oil and gas driller Callon Petroleum's (CPE 0.69%) second-quarter operating results probably wouldn't raise too many eyebrows. Everyone on Wall Street knows oil stocks had an awful second quarter. Callon still managed to deliver operating capital expenses that were below target and surpass its own production forecast.
But Callon and many of its shale-producing peers are in some pretty deep trouble.
Callon has its unique woes. It chose to acquire Carrizo Oil & Gas in an all-stock deal that closed late last year. The roughly $3.2 billion deal included the assumption of Carrizo's debt. Though crude wasn't exactly booming when this deal closed, it was hovering consistently around $60 a barrel. Then the pandemic hit, and oil demand saw a historic drop-off. This has exposed Callon Petroleum's balance sheet as incredibly weak.
Although the bulk of Callon's debt doesn't begin to come due until 2023, it's unclear if the weight of its $3.35 billion in long-term debt is even sustainable beyond 2020. The vast majority of the company's revolving credit line has been drawn down, and Callon ended June with only $7.5 million in cash and cash equivalents. Further, Callon's $477.7 million in current liabilities is more than double its $167.3 million in current assets, suggesting the company doesn't have the assets to cover its expected outlays over the next 12 months.
Despite these very real concerns, ownership in Callon by Robinhood investors surged from 3,600 accounts at the end of February to 117,000 accounts by June. Unless we see a rapid and sustainable surge in crude prices, Callon's strained balance sheet probably won't stave off bankruptcy. If that happens, shareholders are unlikely to receive anything.