If there's one thing you should understand about the stock market, it's that it's consistently unpredictable in the short run. In just a sixth-month period in 2020, we've witnessed the steepest descent into bear market territory in history, as well as the quickest rally back to all-time highs from a bear market bottom on record.
For long-term investors, this heightened volatility is a blessing since it allows for great stocks to be purchased at a perceived discount. After all, the stock market has eventually put every single correction and bear market in history in the rearview mirror.
Avoid these popular Robinhood stocks like the plague
However, cramming a decade's worth of volatility into a six-month stretch has also brought short-term traders and novice investors out of the woodwork. If you don't believe me, just take a gander at how ownership statistics in stocks have ballooned on online investing platform Robinhood since February.
Robinhood, which is best-known for its commission-free trades and divvying out free shares of stock when signing up for an account, has been particularly popular with young and/or novice investors. While encouraging millennials and Generation Z to invest early is actually a great thing, Robinhood is failing to provide the tools and knowledge necessary for these investors to be successful over long periods of time. The end result is that Robinhood's most-held stocks looks like a minefield of penny stocks, awful businesses, and whatever happens to be Wall Street's flavor of the week.
While not all of the most popular Robinhood stocks are avoidable, the shortsightedness of Robinhood investors should make any investor think twice about putting their money to work in any of the platform's most popular stocks.
As we move headlong into September, I believe the following three top Robinhood stocks should be avoided like the plague
Though it's quite possibly the hottest stock on Wall Street right now, I'd strongly suggest investors keep their distance from electric-vehicle (EV) kingpin Tesla (TSLA -0.52%) in September.
Easily the most maddening aspect of Tesla has been the euphoria surrounding the company's 5-for-1 stock split, which went into effect this past weekend. Since announcing that it would split its stock, shares of Tesla have gained nearly $160 billion in market value. While a stock split can signify that a business is running on all cylinders, the split itself is a non-event. In other words, it doesn't create value for shareholders, nor does it change the fundamental outlook for the company. Thus, the almost $160 billion gain in market cap for Tesla looks unwarranted and has probably been driven by short-term traders not wanting to miss out.
Beyond just emotional traders driving Tesla's stock higher, I genuinely worry about Tesla being able to come anywhere close to Wall Street's now-lofty expectations. Much like the airline industry, the auto industry is a capital-intensive, low-margin industry that's based on volume. Tesla's operating margin over the trailing 12-month period is a meager 4.7%, and competition is about to pick up given that Ford and General Motors are investing heavily in EVs and/or autonomous vehicles. Tesla may have had a clear-cut first-mover advantage at one time, but I don't see it anymore.
Additionally, don't overlook how reliant Tesla has been on tax credits to drive its profitability. This is a company that's yet to deliver a generally accepted accounting principles (GAAP) profit on a full-year basis, and who's CEO, Elon Musk, has frequently missed his own product launch and production guidance.
The risk of buying into Tesla here appears to greatly outweigh the potential reward.
Another exceptionally popular Robinhood stock that I'd encourage investors to steer clear of in September is licensed marijuana producer Aurora Cannabis (ACB 1.80%).
On one hand, the bar looks to be low enough for Aurora to step cleanly over when it reports its fiscal fourth-quarter operating results this month. The company has slashed its selling, general, and administrative expenses to a range of $40 million Canadian to CA$45 million per quarter, which was a targeted range to achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It's also closed or sold a total of six of its 15 facilities since the year began.
But these necessary cost-cutting steps don't mask other issues or clues we've been given as investors. For instance, despite licensed cannabis store sales hitting monthly records in Canada, domestic sales figures for major pot stocks to our north are missing the mark in the May-ended or June-ended quarters. Competition is picking up in Canada, and the rollout of higher-margin derivative products has been slowed by regulatory issues.
What's more, Aurora's balance sheet is a mess heading into the company's fourth-quarter report, and it'll likely still be a mess after the report. This is a company that's frequently needed to turn to common stock sales to raise capital, and it's buried its longtime shareholder in these issuances for years. Meanwhile, the company's goodwill, inventory, intangible assets, and property, plant, and equipment values may all be in need of impairment charges.
Marijuana may be one of the fastest-growing industries of the decade, but Aurora Cannabis isn't the pot stock you want to buy to take advantage of this growth.
Your eyes aren't deceiving you. I'd suggest you keep your distance from Apple (AAPL 0.68%) in September for some the same reasons you should avoid Tesla.
Apple, the third-most-held stock on Robinhood, as of mid-August, has been on fire since announcing its intention to split its stock 4-for-1 on July 30. In roughly one month since announcing (and now enacting) its split, Apple's stock gained more than $490 billion in market value. But, once again, a split has no bearing on a company's operating model or fundamentals, suggesting that emotion rather than rational buying has driven Apple's share price higher.
Don't get me wrong, Apple has a lot more to offer, fundamentally speaking, than Tesla. This is a company that has generated $80 billion in trailing 12-month operating cash flow and has one of the most loyal customer bases in the world. It's a very profitable, time-tested company.
But it's not worth paying a 30-plus forward earnings multiple for a company that has historically been valued between 10 and 20 times its forward earnings. Even though Apple's higher-margin services segment is growing at a double-digit rate, it's only accounted for 18.7% of total sales through the first nine months of fiscal 2020. Valuing Apple like a services company when less than 19% of total sales are derived from this high-margin segment doesn't make sense.
Please note that I've not given up on Apple as a company. However, the current valuation, even with its top-notch branding and innovation, isn't appealing to new investors.