When the curtain finally closes on 2020, it'll likely go down as one of the most volatile years in history. The widely followed S&P 500 declined by 34% in under five weeks during the first quarter, then took less than five months to recoup everything that was lost. Meanwhile, the CBOE Volatility Index logged its highest reading ever during the March crash.
Volatility consistently brings young and/or novice investors out of the woodwork. Wild swings in the stock market give young investors the idea that they can get rich quick, which almost always proves fleeting.
We know young investors are flocking to this market thanks to membership and ownership statistics from online investing app Robinhood. Known best for its commission-free trades, fractional-share trading, and gifts of free stock to new users, Robinhood has witnessed a big uptick in member growth. The average age of its users is only 31.
Robinhood has a leaderboard of the 100 most-held stocks on the platform. While you'll find some well-known growth stocks and even a small handful of high-yield dividend stocks, the leaderboard is mostly filled with awful companies. Since many young and/or novice investors don't understand the benefit of long-term investing and what compounding can do over time, they're often chasing after bad companies.
This month, there are three popular Robinhood stocks that investors should avoid like the plague.
American Airlines Group
If there's an industry that I can confidently say people should never put their money into, it's airlines. Airline stocks require lots of capital and a healthy economy just to produce a mediocre margin. If there's even the slightest breeze of economic contraction, airline stocks hit turbulence.
In my view, the worst of the worst in the airline industry is American Airlines Group (AAL 1.00%). American is a well-known major player that recently qualified for a $5.5 billion federal loan tied to the coronavirus disease 2019 (COVID-19). Still, its financial situation seems dire.
Not including this $5.5 billion loan, American Airlines ended June with $9.8 billion in cash and just over $40 billion in debt. At this point, we have no clue when passenger travel levels will get anywhere close to pre-COVID-19 levels -- meaning there's little hope of profitability for American Airlines, even with significant cost-cutting. When (or if) the situation normalizes, American Airlines is going to spend a pretty penny financing its over $40 billion in debt.
Perhaps the only reason to own American Airlines stock has been taken away. In exchange for the financial aid it's received, American Airlines will not be allowed to repurchase its own stock or pay a dividend to shareholders. This capital-return plan was about the only thing keeping American Airlines' stock afloat.
Arguably the worst company in the worst industry, American Airlines Group is a hard pass for investors in October.
Robinhood investors are also very drawn to the coronavirus vaccine race. Among the 100 most-held stocks, six are companies focused on vaccine development or coronavirus diagnostics. Among them is one vaccine developer you'd best avoid: Inovio Pharmaceuticals (INO -6.57%).
On the surface, Inovio's drug development platform and novel electroporation delivery technology look enticing. The company's experimental COVID-19 vaccine, INO-4800, showed an immune response in 94% of phase 1 trial participants at week 6 after two doses. With more than a dozen ongoing clinical trials -- only one of which is for COVID-19 -- investors have piled into Inovio in 2020.
But not all is well.
A little less than two weeks ago, the Food and Drug Administration (FDA) placed a partial clinical hold on Inovio's planned phase 2/3 trial until the company can answer more questions concerning INO-4800 and its proprietary Cellectra delivery device. The coronavirus vaccine space is highly competitive, and the first successful vaccine to market should scoop up significant market share. This setback will almost certainly place Inovio well behind some deeper-pocketed vaccine developers.
Furthermore, Inovio has been in business for four decades but doesn't have an approved therapeutic to show for it. Thankfully, it's received plenty of cash in 2020, so there's little near-term concern about funding. Nevertheless, Inovio has a history of leaving a lot to be desired on the clinical front. For that reason, it should be avoided in October.
Young investors are also enamored with marijuana stocks. Though investing in cannabis could generate plenty of green this decade, Robinhood investors are at a distinct disadvantage. Since they're not allowed to purchase over-the-counter-listed companies, they're usually stuck buying struggling Canadian licensed producers like Tilray (TLRY).
Leading up to the legalization of adult-use marijuana in Canada on Oct. 17, 2018, Tilray was expected to be a major player. It had a well-known medical cannabis line of products and was flush with cash following its initial public offering in July 2018. However, the past two years have not been kind.
To start, Tilray's acquisition of hemp foods company Manitoba Harvest in the first quarter of 2019 now looks grossly overpriced. The deal was primarily to allow Tilray access to Manitoba Harvest's more than 16,000 retail doors throughout North America. Tilray's idea was to use Manitoba Harvest's distribution network to take advantage of the cannabidiol (CBD) craze in the United States. Unfortunately, the FDA put its foot down on CBD as an additive for food, beverages, and dietary supplements in late 2019. Shortly after this decision, the exponential growth rate in CBD sales stalled.
Aside from healthy growth in international medical cannabis sales, Tilray's Canadian sales growth has been unimpressive. With an unclear domestic strategy, the company produced a whopping $81.7 million net loss in the June-ended quarter and a net loss of $265.8 million through the first six months of 2020. Tilray keeps burning cash at an extraordinary rate and may lean on a $250 million at-the-market offering to raise additional capital.
Investors are going to continue to be diluted by share issuances, and there's little sign that these huge operating losses are going to ease anytime soon. That's more-than-enough reason to avoid Tilray like the plague in October.