Robinhood investors are known to be a bit more risk-taking than an average investor. The platform appeals to millennials, and its commission-free trading service entices people to invest even small amounts of money easily. When there's less money at stake, it can be easier to take on risks. Some researchers also believe the app encourages frequent trading (for example, it displays confetti when trades are made).
Unfortunately, high-frequency trading doesn't leave much room for thoughtful analysis of stocks, and it can lead people to buy risky investments. Two of the riskiest among the top stocks on Robinhood today are Cronos Group (CRON -2.61%) and American Airlines (AAL -0.79%). These are stocks that were among the most popular even back in March, before the market crash, and they're still making the list today. Here's why they are bad investments that you should steer clear of.
Cannabis company Cronos is a bad buy for numerous reasons. For one, it's just not worth its current $2 billion valuation. That's richer than Aphria ($1.4 billion) and considerably higher than Aurora Cannabis ($809 million). And yet, Cronos's total revenue for the past four quarters was just more than $31 million. By comparison, Aurora has generated sales of 305.7 million Canadian dollars in the trailing-12-month period ($232.4 million), and Aphria has brought in revenue of CA$369.2 million ($280.6 million) in the same time frame. Cronos is just not generating enough market share to make it a better buy than other Canadian pot stocks.
In its second-quarter earnings for the period ending June 30, reported Aug. 6, net revenue of $9.9 million was up 29% year over year. However, in the Canadian market, its sales were up by just 1%. It was its new U.S. segment that contributed much of the growth, reporting $2.2 million in revenue that wasn't there in the same period last year. It was about a year ago, on Aug. 2, 2019, that Cronos announced the acquisition of Redwood Holding Group, LLC, for $300 million, which expanded its presence south of the Canadian border. The company makes hemp-derived cannabidiol products and owns the Lord Jones brand. But in a crowded hemp market in the U.S., it may not be a slam-dunk that this U.S. acquisition will continue to drive growth for Cronos in the future.
With a high valuation and little organic growth, there's just not a reason to buy Cronos today. The stock is down 28% year to date, well below even the Horizons Marijuana Life Sciences ETF (HMLSF 6.16%), which has declined just 6% over the same time frame.
American Airlines isn't a risky buy because it's expensive; at a price-to-earnings multiple of less than 3, it could make for an attractive value buy. The problem is that there are serious long-term issues surrounding the airline industry. Even after the COVID-19 pandemic subsides, it'll be years before travel numbers get back to their previous levels. According to the International Air Transportation Association (IATA), a full recovery won't happen until 2024.
However, given the unpredictability of COVID-19 and how long it'll be around, there's certainly no guarantee that IATA won't push back that estimate. A possible second wave of COVID-19 this fall could throw any and all projections out the window.
That paints a bleak picture for any airline company, including American. The company needs help (funding) from the government, and if it doesn't get it, it'll need to lay off 19,000 workers by as early as October. American had more than 133,000 employees when the year began but is looking to shed a minimum of 40,000 people. Some workers agreed to leave voluntarily and take early retirement buyout packages, but that hasn't been enough to meet the company's goal.
In the meantime, the Texas-based company remains in survival mode to do what it can to keep operating. On July 23, American released its second-quarter results for the period ending June 30, and sales of $1.6 billion were down 86% from the $12 billion it generated in the same period last year. Its net loss of $2.1 billion was down drastically from a profit of $662 million in the prior-year period. The good news for American is that this was a particularly bad quarter for the economy -- nearly every business was hampered by shutdowns, especially during the months of April and May. The third quarter should be better, as cities started opening back up in June.
Management stated in the earnings release that they are trying to preserve cash. American's operating and capital expenses will decline by at least $15 billion in 2020, largely because of fewer flights this year. In 2019, the company spent $42.7 billion on operating expenses, and its capital expenditures totaled $4.3 billion.
Although American's keeping its head above water right now, this is an extremely risky stock to be holding. As long as COVID-19 is weighing down the economy, it puts the company at risk. Shares of American Airlines are down more than 51% this year, while the S&P 500 has climbed more than 5%. And there's little reason to be optimistic that the stock will recover anytime soon.
These stocks aren't worth gambling on
While Robinhood investors may see these underperforming stocks as opportunities to score some great returns if they recover, that's just not a likely outcome for the foreseeable future. Cronos may turn things around, and American may rally if all the stars align and there isn't a second wave of COVID-19, but a lot would need to go right for either of those things to happen. Investors -- at Robinhood and elsewhere -- are better off investing in other growth stocks that have brighter futures and that are more resilient to COVID-19.