Stocks that are popular on the trading platform Robinhood can often do better than the S&P 500 in part because they've got much more hype behind them than the average stock. And while September was a rough month for the market and the index, which fell by 4%, that wasn't the case for some Robinhood stocks. Eastman Kodak (KODK -1.93%), DraftKings (DKNG -0.87%), and Zoom Video Communications (ZM 0.05%) are all beloved among Robinhood investors, and they all soared more than 40% during the past month.
Let's take a closer look at why those stocks rallied so much and whether they're still good buys today, or if they've gotten too expensive to own.
1. Eastman Kodak
Kodak's stock has been volatile since late July, when investors learned the company was pivoting from photos, printing, and publishing to healthcare and that it would, in fact, be receiving a $765 million loan from the government to help make ingredients for generic pharmaceuticals. The stock hit a peak of $60 on the news (previously, it was trading at a little over $2).
But the New York-based company's shares plunged in August. It fell below $6 by the end of the month among suspicions of insider trading when it was revealed that Kodak executives had been buying up shares before the public became aware of the federal loan. The U.S. Development Finance Corporation, which issued the loan, announced it would need to review the situation and that it would be putting the loan on hold for the time being.
Image source: Getty Images.
Kodak's stock rallied in September, though, rising 47% to finish the month at $8.82. The sharp increase was thanks to the findings of a legal firm that Kodak hired, Akin Gump Strauss Hauer & Feld LLP, which determined that while there were governance issues relating to the loan announcement, Kodak didn't appear to be in violation of any laws.
Given that the stock climbed from $2 to $60 within just a week's time, September's 40%-plus increase in its share price looks relatively modest. The problem for investors today is that the company isn't out of the woods just yet -- and there's no guarantee it'll get the loan back.
With the volatility surrounding this stock, it's clear that Robinhood investors aren't looking at multiples when they're buying shares of Kodak. Investors are either extremely bullish or extremely bearish on this stock, and that makes it nearly impossible to guess where Kodak's shares will go next. This is a risky stock to own, and investors who buy today could easily suffer significant losses if there's more bad press to come.
2. DraftKings
Now that sports are back, stocks like DraftKings are soaring. The stock rose 66% in September, and the Massachusetts-based fantasy sports business has been making headlines for all the right reasons.
On Sept. 2, the company announced NBA legend Michael Jordan would be coming on board as a special advisor to DraftKings' board of directors. Then on Sept. 14, investors learned the company had entered into a multi-year agreement with ESPN, under which it will integrate with the popular cable sports channel and be its exclusive provider of daily fantasy sports.
DraftKings began trading April 24 after completing a reverse merger, and it's been one of the hottest stocks this year. Robinhood investors are bullish on DraftKings despite its underwhelming financials, with the company incurring losses totaling $230.1 million through the first six months of 2020. However, sales of $159.5 million look strong during that period, rising 27% year over year.
This is another stock investors need to be careful with, because while DraftKings is showing a lot of promise, it's an extremely expensive stock to own. Even if the company were to post $540 million in revenue for 2020 (the upper end of its pro forma revenue guidance for the year), that would still put the stock at a price-to-sales ratio of 39. By comparison, Penn National Gaming, which is also in the sports betting industry, trades at only twice its revenue.
3. Zoom Video Communications
Zoom's been one of the big winners in 2020 as the coronavirus pandemic and related social distancing measures have led many businesses and individuals to adopt its videoconferencing software.
After Q2 results were released Aug. 31, Zoom's stock climbed 45% in September. The San Jose-based company reported an incredible performance, with its quarterly sales of $663.5 million soaring 355% from the same period last year. In the second quarter, which covered the three-month period ending July 31, Zoom also posted a strong profit of $185.7 million, compared to a net income of just $5.5 million in the prior-year period.
The strong performance set the stage for yet another impressive month for the tech stock. But at more than 100 times revenue, this one is also trading at a significant premium to its sales. Slack Technologies, which also helps businesses stay connected through its group chat platform, trades at less than 20 times revenue.
Which stock is the best buy today?
All three stocks on this list are soundly outperforming the S&P 500 this year:
Picking the best stock to invest in right now, however, is tricky because none of these are cheap investments. I'd stay away from Kodak because of its unpredictability right now and how volatile it's been over just the past few months. Its popularity on Robinhood only exacerbates those concerns.
Deciding between DraftKings and Zoom will ultimately depend on your outlook regarding COVID-19. If you think cases will continue to climb and you're worried about a second wave leading to more restrictions and possible shutdowns, Zoom is probably your better bet. But if you're optimistic the economy will continue recovering, and sports leagues will be able to continue operating, then DraftKings may be the better growth stock to buy today.
