There's no question that investing in 2020 has been an adventure. In roughly a six-month stretch, the benchmark S&P 500 lost more than a third of its value to investor panic and uncertainty surrounding the coronavirus disease 2019 (COVID-19) pandemic -- only to completely rebound.
Tenured investors didn't overreact to this wild period. That's because every correction and stock market crash in history has eventually been put into the rearview mirror by a bull market rally. Long-term investors simply played the odds and remained invested in businesses that offer game-changing innovation and/or sustainable competitive advantages.
But this heightened volatility has proved an irresistible lure for short-term traders and novice investors. Online investing app Robinhood, which is known for its commission-free trading and gifting of free shares of stock to new members, has seen millennials and/or novice investors flock to its platform. As a result, the company's leaderboard (i.e., the most widely held stocks on Robinhood) is filled with penny stocks and otherwise awful companies.
Interestingly, it's not that Robinhood investors are choosing poor industries to invest in. Rather, they're chasing the wrong pony within those industries. Consider this the latest edition of "buy this, not that," but for Robinhood investors.
Robinhood investors are completely missing out on the juiciest growth story in the cannabis space -- the U.S. market -- because Robinhood won't let its users invest in over-the-counter (OTC) securities. But that hasn't stopped them from making some awful purchases.
Don't buy: If there's one company I'd really steer investors away from, it's Aurora Cannabis (ACB -7.35%). If the nearly 96% decline in shares since March 2019 isn't enough of a reason to keep your distance, here are a few more:
- It wrote down more than $2.8 billion Canadian in value in fiscal 2020, erasing a significant portion of its total assets.
- Aurora's management team has continually moved the goalposts when it comes to reaching positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Aurora's board approved a $350 million (that's U.S.) at-the-market offering earlier this year, which continues years of ongoing share-based dilution.
What investors thought they were buying into, even as recently as the beginning of 2020, is no more.
Buy this: Instead of Aurora Cannabis, I'd encourage investors to open a separate brokerage account (i.e., one that'll allow them to buy OTC pot stocks) and purchase Green Thumb Industries (GTBIF 4.11%). Green Thumb has opened 48 dispensaries to date, but holds enough retail licenses to double this to 96.
Green Thumb has been very methodical in where it's chosen to set up shop. This is a company with a burgeoning retail presence in Illinois, which opened its doors to adult-use cannabis on Jan. 1, 2020, and Nevada, which seems on track to lead the country in cannabis spending per capita by 2024. Both markets should reach at least $1 billion in annual legalized weed sales by 2024.
But the best aspect of all is that roughly two-thirds of the company's sales are derived from higher-margin derivatives, such as edibles and beverages. Since dried cannabis is easily commoditized, Green Thumb's focus on derivatives should see it push comfortably into recurring profitability next year.
I'm all for Robinhood investors putting their money to work into the high-growth social media industry. If anything, we're spending more time than ever connecting with friends and family through social platforms these days. But Robinhood investors' social media stock of choice simply isn't that appealing.
Don't buy: Robinhood investors have been enamored with Snap (SNAP -2.69%). Though Snap prefers to be called a camera company, the vast majority of its revenue is derived from digital advertising.
The biggest problem with Snap is that the company's average revenue per user (ARPU) trends haven't been that exciting for years. ARPU growth has been decelerating notably with each passing year, and daily active user (DAU) count rose by only 17% from the prior-year period in the second quarter. Put another way, in the quarter when people were stuck home due to COVID-19, Snap saw only 17% DAU growth, and ARPU was flat on a year-over-year basis.
What's more, Snap doesn't appear to be particularly close to profitability. That's a concern when its ARPU growth has notably decelerated.
Buy this: My suggestion would be to forget about Snap and buy the faster-growing Pinterest (PINS -0.95%) instead. Pinterest might be losing money like Snap, but its metrics aren't decelerating at a worrisome pace.
For example, Pinterest added 116 million monthly active users (MAU) since the end of June 2019, representing an increase of 39%. Additionally, even though global ARPU declined in the second quarter of 2020 as a result of reduced ad spending, Pinterest's international ARPU still jumped 21% from the prior-year period, and more than doubled on a full-year basis in 2019. Pinterest is a much faster-growing social media asset, and presumably more prized by advertisers.
Furthermore, Pinterest has the opportunity to become an e-commerce powerhouse this decade. With its 416 million MAU willingly posting their interests and hobbies to the platform, the company would be doing a disservice by not connecting these motivated users with small businesses that cater to their interests. Having already partnered with Shopify to aid those small businesses, and now utilizing video to improve user engagement, Pinterest looks well on its way to supplementing its growth in the years ahead.