It's been an exceptionally volatile year on Wall Street, with the broad-based S&P 500 losing more than a third of its value at one point during the first quarter, then regaining everything that was lost in under five months. The CBOE Volatility Index saw its highest reading on record in March.
When volatility spikes, we often witness young and novice investors pile into the stock market in hopes of getting rich quick. Just take a peek at the rapidly growing membership data for online investing app Robinhood if you don't believe me.
Robinhood, which is best known for offering commission-free trades, fractional-share investments, and gifts free shares of stock to new users, has gained millions of members in 2020. The average age of its users is just 31. While it's great that young people are putting their money to work in the stock market, Robinhood isn't giving its members the tools or education needed to understand the importance and compounding potential of long-term investing. As a result, Robinhood investors own a lot of awful companies.
Here are three of the most popular Robinhood stocks that investors should probably give up on.
If there's an investment trend that millennials absolutely love, it's marijuana. Unfortunately, Robinhood investors aren't allowed to buy over-the-counter marijuana stocks, which relegates them to invest in underperforming Canadian pot stocks. Among these, young investors have latched onto Aurora Cannabis (ACB -4.70%).
As of mid-March 2019, Aurora Cannabis looked like it had its ducks in a row. It had 15 cultivation facilities and was capable of well over 600,000 kilos of weed output per year at its peak. The company also had access to two dozen countries outside of Canada. As the icing on the cake, Aurora had hired billionaire activist investor Nelson Peltz as the company's strategic advisor. The expectation was that Peltz, who had strong ties to the consumer packaged goods industry, would be the bridge to an equity investment from a brand-name food or beverage company.
Today, Aurora Cannabis is a dumpster fire. It's closed five of its smaller production facilities, sold a 1-million-square-foot greenhouse that was never retrofit for pot production, and halted construction on two of its largest projects to conserve cash. Peltz has also stepped down from his role as an advisor.
What's more, Aurora's domestic pot sales have been stagnant despite licensed cannabis store sales in Canada hitting all-time highs. The company and its peers are being forced to compete with illicit producers by selling value products that are absolutely crushing margins.
Aurora's balance sheet has also been an utter mess. In fiscal 2020, the company took nearly $3 billion Canadian in writedowns, and its cash situation is precarious at best. The only effective way for Aurora to raise capital has been to undertake at-the-market stock offerings that dilute existing shareholders.
Long story short, Robinhood investors should give up on Aurora Cannabis.
Another popular stock with millennial investors that'll have you absolutely scratching your head in disbelief is shipping company TOP Ships (TOPS -2.98%).
Prior to the Great Recession, TOP Ships was an in-demand company with a potentially bright future. However, with the pricing for contracts to ship oil, petroleum product, and certain liquid chemicals falling steadily throughout much of the past decade, TOP Ships is an even greater mess than Aurora Cannabis.
I believe the only reason TOP Ships avoided a bankruptcy reorganization after the Great Recession is that it's been liberally selling its stock to raise capital and enacting reverse to avoid delisting from the Nasdaq. This rinse-and-repeat cycle has completely destroyed shareholder value, yet continues to attract investors who may not know better.
Over the past 12.5 years, TOP Ships has enacted 10 reverse splits to avoid being delisted to the OTC exchange. Seven of these reverse splits have taken place since May 2017, with a number of them being large in scale (1-for-10 or larger). After hitting its all-time reverse-split-adjusted high in 2004, TOP Ships has fallen from (I hope you're sitting down for this) $4,562,459,852,800.00 a share to the $1.13 a share it closed at on Oct. 19.
Even with TOP Ships' execs pledging not to sell any stock to raise capital or enact any reverse splits in the near future, the company's history of obliterating shareholder value in an industry with declining fundamentals tells a different tale. Robinhood investors are urged to avoid TOP Ships.
A final stock that Robinhood investors need to give up on is car rental giant Hertz Global (HTZG.Q).
Hertz caught fire shortly after its May bankruptcy filing on the possibility that it could be acquired. It again more than doubled last week after securing $1.65 billion in debtor-in-possession financing to continue its operations during its reorganization process. As you may have guessed, Hertz was pushed into bankruptcy after the coronavirus pandemic caused travel to plummet.
Unfortunately, wishful thinking isn't going to get investors very far with Hertz. The company has about $19 billion in debt on its balance sheet, most of which is tied to its fleet of vehicles. It now has an additional $1.65 billion in debtor financing on top of that. If and when Hertz exits bankruptcy, the company's bondholders are going to hold the vast majority of equity in the company. It's possible common stockholders could receive some equity during the reorganization, but it's far likelier that they won't receive a red cent when all is said and done.
What's also unclear is when the U.S. travel industry is going to return to normal. There are many unknowns surrounding a coronavirus vaccine and travelers' willingness to take vacations, or even business trips. Even after reorganizing under the umbrella of Chapter 11 bankruptcy, Hertz is no sure success.
In short, Robinhood investors should hit the brakes and exit the vehicle.