It's been a wild year on Wall Street, and Robinhood investors simply can't get enough of it.
Robinhood, the online investing platform best known for offering commission-free trades and doling out free shares of stock for new members, has attracted a veritable army of young and/or novice investors who seem hell-bent on trying to time the market and trade these periods of heightened volatility. While Robinhood's leaderboard (i.e., the platform's most-held stocks) does feature some quality companies, there's little doubt that these millennial/novice investors love penny stocks and Wall Street's flavor of the week.
Robinhood investors are also big-time fans of buying into controversial stocks. Among the 100 most-held stocks on the platform, investors simply can't stop buying into the following three controversial companies.
First up is electric vehicle (EV) and fuel-cell vehicle manufacturer Nikola (NASDAQ:NKLA), which as of the beginning of September was the 36th-most-held stock on the Robinhood platform.
On the one hand, there's a very strong case to be made for EV growth over the coming years and decades. Demand for proven EV trucks, which is what Nikola specializes in, should be incredibly strong. Nikola also landed a $2 billion equity investment from General Motors (NYSE:GM) a little over two weeks ago. General Motors gained a board seat through its equity investment, and will be responsible for producing Nikola's electric and fuel-cell pickup, the Badger.
It sounds like a great story, and it's done a very good job of attracting Robinhood investors. Unfortunately, the company has yet to prove there's actually cake beneath the frosting.
Two weeks ago, Nikola was hit with allegations of fraud by noted short-side firm Hindenburg Research. Hindenburg claims to have evidence of wrongdoing and false claims by the company and its founder, Trevor Milton. The Securities and Exchange Commission has begun a probe into Nikola following these allegations.
The short-side investment company also suggests that Nikola grossly overstated the ability of its EV trucks and battery/fuel cell technology. Nikola's recent partnership with General Motors, and its reliance on GM to supply batteries and fuel cells for its EV/fuel cell pickup, provides additional skepticism of Nikola's ability to develop and deploy its own technology.
Things got even weirder this past week when Milton announced via a middle-of-the-night tweet that he would be stepping down as executive chairman of the Nikola board. Though he intends to defend himself against Hindenburg's claims, Milton will do so as a major shareholder who no longer has any direct say over the company's operations.
Put simply, we have no clue what Nikola is at this point. With practically no revenue to its name, it's the type of stock that should be avoided at all costs.
Another controversial stock that Robinhood investors can't seem to get enough of is printing and imaging company Eastman Kodak (NYSE:KODK). Kodak was the 80th-most-held stock at the beginning of the month.
Eastman Kodak became all the rage in late July when its stock skyrocketed more than 25-fold, on an intraday basis, over just three trading sessions. This surge was the result of being awarded a $765 million loan from the federal government under the Defense Production Act. After decades of being a film giant, Eastman Kodak was set to produce ingredients that would be used to manufacture generic drugs to treat the coronavirus disease 2019 (COVID-19).
A company with no prior work in the healthcare arena winning a contract to produce ingredients for generic drugs -- what could go wrong? Apparently, a lot.
To begin with, the company had to conduct an internal investigation into potential wrongdoing by executives. Specifically, some Kodak executives, including CEO Jim Continenza, were awarded stock options the day before the loan announcement was made public. However, Kodak's executives knew about the loan for roughly a week prior to announcing it. Even though an internal investigation found no specific signs of wrongdoing, the SEC is still conducting an investigation into potential insider trading.
Additionally, Eastman Kodak has a history of being an awful company, at least fundamentally speaking. The company's pivot away from digital photography has not gone well, with Kodak riding a 14-year streak of declining revenue. Since 2005, Kodak's full-year sales have plunged from $14.3 billion to just over $1.2 billion in 2019. Taking into account the COVID-19 chaos we've seen globally in 2020, this is liable to become a 15-year streak.
With no signs of growth in sight and the company's management team still under the microscope, it's absolutely a stock to shy away from.
The good news is that Aurora, unlike Nikola or Kodak, isn't under investigation by regulators, nor have its executives been accused of wrongdoing. But that doesn't mean the company isn't controversial.
By roughly the midpoint of 2019, Aurora Cannabis looked to be the blueprint of success in the Canadian marijuana industry. It had 15 production facilities that, when fully operational, could yield more than 600,000 kilos of cannabis a year, and had access to two dozen markets outside of Canada. Its economy of scale and international reach were widely expected to make it a winner, but it's been nothing of the sort.
The Aurora Cannabis you see today is a shell of the blueprint for success that investors thought they were buying. The company has shuttered five of its smaller facilities, sold a 1-million-square-foot greenhouse that was never retrofit for pot production, and halted construction on two of its biggest projects, all to conserve capital. On a peak production basis, it's not even the largest cannabis producer anymore.
Aurora Cannabis has also produced one of the ugliest balance sheets on record. After grossly overpaying for its more than a dozen acquisitions since Aug. 2016, the company was left with more than $3 billion Canadian in goodwill at one point. During fiscal 2020 (ended June 30), the company wrote down roughly half of its total assets.
And if this weren't enough, Aurora has also been continuously diluting its shareholders for years. With few avenues to raise cash, the company has relied on selling stock to cover its expenses. Taking into account the 1-for-12 reverse split that became necessary in May to avoid delisting from the New York Stock Exchange, Aurora's share count has ballooned more than 80-fold from the 1.3 million shares it had outstanding six years ago.
The one thing Aurora Cannabis has most certainly not shown investors is the green.