Robinhood is an app and website that offers commission-free investing, an its users typically focus on growth stocks and investments that can deliver strong results, especially in the short term. That's why many popular stocks on Robinhood today include banks, marijuana businesses, and travel companies -- some of the more speculative investments amid a recession and the coronavirus pandemic. Robinhood investors are willing to take a chance on a stock if there's a great return possible.
Today, I'll look at two stocks that are ranked high on Robintrack, a website that continuously tracks the most popular stocks on Robinhood. These two are simply bad buys, stocks that aren't likely to generate strong returns if you invest in either today. Netflix (NFLX 0.10%) is No. 27 on Robintrack and OrganiGram Holdings (OGI +0.69%) is currently No. 45. Neither should be ranked as high as it is today, and I'll look at why.
Netflix
Netflix has a strong and growing business built around quality streaming content without the need for cable. It's led many consumers to cut the cord and just opt for a Netflix subscription along with their internet service to reduce their bills (the company's most affordable streaming subscription is $9.99 a month).
Image source: Getty Images.
The California-based business has done well during the early stages of COVID-19. In its second-quarter results, for the period ending June 30, Netflix reported net subscriber additions of 10.1 million, well above the 8.3 million that analysts expected. As of June 30, the company had 192.9 million paid memberships around the world.
But management did caution that the impressive growth may not last. It expects just 2.5 million net subscriber additions in the third quarter, far fewer than the 5.3 million Wall Street analysts are projecting. One of the reasons for investor concern about the company's growth is the competition it faces. With streaming services Disney+, HBO Max, and Peacock all launching within the past 12 months, it's going to be more difficult for Netflix to continue adding subscribers -- especially amid a recession, when consumers may not be able to balance having multiple subscriptions.
But those growth concerns wouldn't be enough to make the stock a bad buy. Instead, the egregious valuation multiples are what make it an unattractive investment. At a price-to-earnings multiple of more than 80 and a price-to-book ratio of 23, the stock would make value investors cringe. And even if you're a growth investor, the stock's price-to-earnings-growth ratio of close to 3 also suggests that its price tag is far too hefty given the growth analysts expect from the company.
Although the stock is nowhere near its 52-week high of $575.37, it will need to come down a long way before being a good buy for Robinhood followers and any other growth-oriented investors. Year to date, it's up around 50%, far outpacing the S&P 500 and its 4% returns thus far.
OrganiGram
OrganiGram is a bad buy for different reasons. The cannabis company would love to have the tech giant's problems -- strong growth numbers starting to taper off and the need to keep its industry dominance intact. But right now, OrganiGram investors would just love to see consistent growth from the Canadian cannabis company.
It produces cannabis for both the medical and recreational markets and is banking on growth from the edibles segment. In May 2019, OrganiGram announced an investment of 15 million Canadian dollars ($11.4 million) into a technology that would allow it to produce chocolate cannabis edibles through automation.
The problem is that despite all those potential growth avenues, OrganiGram is struggling to, well, grow. Its third-quarter results, covering the period through May, showed net revenue of CA$18 million, down 27% from the same quarter last year. It was even less than the CA$23.2 million net revenue that OrganiGram reported in the second quarter.
And without sales growth, there's really not much reason to invest in OrganiGram. For six straight periods, the company has reported a net loss. And its Q3 loss of CA$89.9 million was also a high for OrganiGram. Impairment losses totaling CA$37.7 million were a big part of that.
Although OrganiGram stock trades at a little over book value, that's not enough to make it a good buy given the growth challenges and lack of profitability. Year to date, the stock is down 44%, versus the 23% decline in the Horizons Marijuana Life Sciences ETF (HMLSF 1.17%).
Why Robinhood investors should ditch both of these
Netflix may continue to do well this year as people stay at home. But there's a lot of risk in the stock, especially if there's a market crash. Its high valuation makes it vulnerable in the event of a sell-off in the markets. And so while its business may be sound and continue to do well, the stock itself is just not a good buy. Robinhood investors looking to gain a strong return may be disappointed if they invest in Netflix today, especially with competition on the rise.
OrganiGram, meanwhile, is already disappointing investors with both poor results and weak growth numbers. Outside of the cannabis hype, its popularity with Robinhood investors is a mystery.
There are many other growth stocks that are better buys out there for Robinhood investors to consider; Netflix is too expensive and OrganiGram needs to improve its financials to be worth investing in at all.
