This has been a record-breaking year in many ways for Wall Street. We've watched the CBOE Volatility Index hit its highest reading in history, observed the quickest bear market decline on record, and bore witness to the fastest rebound to fresh highs from a bear market low of all time.
For long-term investors, this heightened volatility has been a blessing that has allowed farsighted investors to pick up high-quality companies on the cheap.
Volatility also has a way of attracting short-term traders. Robinhood's rapidly growing membership is testament to this fact.
Online investing app Robinhood, long known for its commission-free trades and gifts of stock shares to new members, has attracted millions of users. These online investing members are only 31 years old on average. Many of them chase whatever hot stock dominates the news on Wall Street in any given week. As a result, Robinhood's leaderboard (i.e., its list of the most popular stocks) is filled with some truly awful companies.
This leaderboard is in constant flux, with Robinhood members adding new businesses all the time. Three stocks recently popped onto the leaderboard, two of which are newly listed companies. Here are the three new stocks Robinhood investors can't stop buying.
Easily the most exciting newly listed stock that Robinhood investors are buying into is data-mining company Palantir Technologies (NYSE:PLTR).
The much-hyped Palantir chose not to sell stock via an initial public offering. Rather, it went the direct-listing route on Sept. 30, which allowed existing shareholders to sell their common stock to the public. Without investment banks to overhype the Palantir debut, the stock opened at a reasonable 20 times this year's projected sales. Mind you, 20 times sales is historically expensive, even for a tech stock. But when talking about anything having to do with cloud computing or data mining, 20 times sales is roughly middle of the pack in terms of premium. Thus, the Palantir direct listing gave investors an opportunity to buy in at a reasonable price.
What's more, Palantir's growth has been accelerating, not decelerating, in 2020. During the toughest quarter for the U.S. economy in decades, Palantir generated solid growth from both its Gotham platform, which services its contracts with the federal government, and its Foundry data-mining solutions, which takes care of its enterprise clients. Full-year sales in 2020 seem on track to grow by close to 35%.
Ultimately, the Foundry platform offers the greatest long-term growth prospects. Palantir currently chimes in with about 125 clients, but has only scratched the surface of landing major multinational companies as customers.
Sustainable double-digit growth potential is likely from Palantir for many years to come, which makes this an intriguing buy for Robinhood investors, as long as they have the intention of holding over the long run.
Not every leaderboard stock on the Robinhood platform deserves its investors' money. Quebec-based Canadian licensed producer HEXO (NASDAQ:HEXO) is a company that once held a top-20 position on Robinhood's leaderboard before falling off completely. It's back and looking as awful as ever.
At the midpoint of 2019, HEXO was in decent shape. It had acquired Newstrike Brands and its Niagara cultivation facility to boost its capacity and was focused on an assortment of higher-margin derivative products. However, regulatory-based supply issues have created supply bottlenecks in key provinces. HEXO responded by closing Niagara and selling the facility for a mere $10.25 million Canadian, as well as curtailing output at its flagship Gatineau facility.
Another key problem for HEXO has been financing. Even though Canada has legalized adult-use marijuana, no bank in their right mind is going to open their wallet to HEXO. In recent months, the company has been forced to lean on at-the-market stock offerings to raise capital. In doing so, it's continuing to dilute existing shareholders, much like some of its peers (ahem, Aurora Cannabis).
Making matters worse, HEXO has consistently traded below $1 a share since March, excepting a handful of days in June. The company has until mid-December to get its average share price back above $1, or it risks being delisted from the New York Stock Exchange. A reverse split is also on the table, but is often viewed by Wall Street as a move made out of weakness.
Point blank, HEXO is backpedaling on its spending to hopefully survive for the long term. Last I checked, hope isn't a viable investment strategy. Robinhood investors would be wise to dump HEXO.
The third stock that Robinhood's millennial and novice investors have been piling into is recent IPO Rocket Companies (NYSE:RKT). Rocket is the company behind the Quicken Loans and Rocket Mortgage online loan origination services.
Things have never been this perfect for Rocket Companies. The coronavirus disease 2019 (COVID-19) pandemic has pushed more prospective homebuyers and homeowners online for their loan origination services. Further, the Federal Reserve has moved its federal funds rate back to a record-tying low, and has stated publicly that it has no intention of raising this rate any time before 2023. The implication is that mortgage loan and refinance rates will remain at or near historically low levels, thus enticing folks to buy a home or refinance their existing mortgage.
Investors have certainly witnessed these perfect conditions translate into stellar growth for Rocket Companies. Closed origination volume in the June-ended quarter rocketed (pardon the pun) higher by 40% from the sequential quarter and 126% year over year, with total revenue up 268% sequentially and 437% year on year. Rocket is crushing it right now, and is valued at a mere 7 times Wall Street's forecast earnings for 2020.
Yet there's some hesitancy. Mortgage rates are almost certainly at or near their lowest levels, which means loan originations are going to fall hard in 2021 or 2022. We've previously witnessed how spoiled prospective buyers and homeowners have been with historically low lending rates (i.e., mortgage originations fall hard when rates bounce upward), making Rocket something of a boom-bust business.
I'm not saying Rocket Companies is a sell, but Robinhood investors should temper their expectations moving forward.