This has been a year of many records. We've seen the benchmark S&P 500 nosedive into bear market territory faster than ever before, and saw the broad-based index erase the entirety of its bear-market decline in under five months, representing the fastest rebound from a bear market to new all-time highs. All the while, investors have had their resolves tested like never before.
For long-term investors, this step-up in volatility is actually a welcome sign, as it's allowed patient folks to buy into great companies at a perceived discount. But heightened volatility can have a dark side, too, as it's known for encouraging short-term trading and penny stock chasing.
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If you need evidence of this, just take a gander at online trading platform Robinhood. The prototypical "Robinhood investor" is often thought of as a millennial and/or novice investor who's frequently trading in and out of stocks, or chasing highly volatile penny stocks. Robinhood's leaderboard (i.e., the most held stocks on the platform) is a testament to this, with numerous awful stocks among the most-held on the site.
But if there's one pattern that's fairly consistent among Robinhood investors -- other than the fact that they tend to be young -- it's their love for growth stocks. With the Federal Reserve pledging to keep the federal funds rate at historic lows through 2022, borrowing costs are extremely cheap right now. That favors fast-growing companies looking to take on debt to expand.
Furthermore, growth stocks have trounced value stocks since the end of the Great Recession, providing the recency bias that likely attracts Robinhood investors.
Below, you'll find three of the fastest-growing stocks that Robinhood investors can't stop buying. Note, I've specifically focused on the platform's top-40 holdings, and excluded businesses that have no products or minimal revenue (e.g., Nikola and Inovio Pharmaceuticals).
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Moderna: 140% estimated CAGR (5-year)
Easily the fastest-growing favorite among Robinhood investors is drug developer Moderna (MRNA 0.51%). According to Wall Street estimates, Moderna should see its annual sales skyrocket from around $60 million in 2019 to north of $4.7 billion by 2024, which works out to a compound annual growth rate (CAGR) of 140%.
The big lure of Moderna is the company's development of mRNA-1273, a vaccine for the treatment of SARS-CoV-2, the virus responsible for the coronavirus disease 2019 (COVID-19). Moderna was the first biotech company to begin testing a phase 1 vaccine on humans, and reported positive results from this interim analysis in mid-July. Those results showed neutralizing antibodies in 100% of evaluated trial participants, and no severe adverse events through 57 days.
Moderna began enrollment for a 30,000-person phase 3 trial on July 27 for mRNA-1273, and it has $955 million in federal government backing via Operation Warp Speed. The company also secured a deal to sell the federal government 100 million doses of its experimental for $1.53 billion, with the option for the government to purchase an additional 400 million doses.
There's no doubt that the initial market for COVID-19 vaccines will be massive. But with so many companies developing a vaccine, it's unclear just how much of the "pie" Moderna is going to be able to secure. Paying nearly $27 billion in market cap for a clinical-stage company seems a bit outlandish to me.
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Cronos Group: 104.4% estimated CAGR (5-year)
Another high-growth stock that Robinhood investors can't stop buying is Canadian licensed cannabis producer Cronos Group (CRON 1.91%). According to Wall Street, Cronos' sales should catapult from $24 million Canadian in 2019 to CA$856 million by 2024.
Aside from being a "marijuana stock," which for years has been a big enough draw for millennial investors, the single-biggest catalyst for Cronos Group was a $1.8 billion equity investment received from tobacco giant Altria Group (MO 1.61%) in March 2019. When the deal closed, Cronos had $1.8 billion in cash with which to expand its operations into new markets, and Altria, presumably, had a new future source of revenue besides tobacco in the United States. Altria's stake in Cronos amounts to 45%.
The assumption here is that Cronos Group will put its cash to work in high-margin derivatives (i.e., non-dried flower products), such as vapes and edibles. Having Altria as a vested partner would make vapes a logical target for the company, as Altria has a wealth of knowledge with regard to marketing smokable products to adults.
Unfortunately, things haven't panned out for Canadian pot producers. Regulatory-based issues haven't allowed nearly enough dispensaries to open in key provinces, and health concerns have constrained vape sales. Since Cronos Group doesn't have much in the way of marijuana production outside of its Peace Naturals facility, it's continued to deliver less than $10 million in sales each quarter. Even the company's cash balance has shrunk to about $1.32 billion.
Cronos remains a cannabis stock to avoid, not buy.
The NIO ES8 electric SUV. Image source: NIO.
NIO: 49% estimated CAGR (4-year)
The third-fastest-growing stock that Robinhood investors are buying is electric-vehicle (EV) manufacturer NIO (NIO 0.51%).
With visions of Tesla and its moonshot over $2,000 a share dancing in everyone's heads, China's leading EV maker NIO has millennials believing they've found the next Tesla. Recent operating results would seem to suggest there might be some substance to this idea. Second-quarter deliveries of its ES6 and ES8 premium electric SUVs totaled 10,331, which is nearly triple the 3,553 deliveries from the year-ago period. Though deliveries have been historically lumpy, this is a big step forward for NIO.
Additionally, the company announced the launch of a battery-as-a-service (BaaS) business model last week. This BaaS model will reduce the initial cost of its EVs, but enroll buyers in a monthly subscription service that'll handle battery replacements and upgrades. By trading a little margin now for juicier subscription revenue later, NIO's management team is making a smart move.
Of course, NIO isn't cheap, and its shareholders probably realize that. It could well be three-to-five years before NIO is turning a recurring profit, even with compound annual revenue growth of 49% projected over the coming four years. But given China's burgeoning middle-class population and NIOs potential to scale, there could still be upside here for patient investors.
