For some, the millennial-friendly investing app Robinhood has an unfortunate reputation as a platform for risk-hungry speculators. That's because some of its most popular stocks have weak fundamentals and a track record of poor performance. Genius Brands (GNUS 3.36%) and Eastman Kodak (KODK 4.45%) fit the bill. Let's explore the reasons why Robinhood investors should stop buying these stocks.
Genius Brands is a children's entertainment company that recently rocketed to popularity after announcing the planned launch of its Kartoon Channel streaming platform in May. The news sent Genius Brands stock to its 52-week high of $11.73 in June before falling to $1.55 at the time of writing.
Genius Brands faces continued downside pressure because of its failure to turn hype into substance, as well as relentless equity dilution.
Billed as a potential "Netflix for kids," Kartoon Channel is a subscription-free entertainment platform that offers fun and educational content for young people. But aside from seemingly exaggerating the platform's potential, management hasn't provided any color on how much revenue or profit they expect it to generate. This might not be the only time Genius Brands has overpromised and underdelivered.
The company faces at least three class action lawsuits over alleged violations of the Securities and Exchange Act through misleading statements related to the commercial value of its business ventures. Genius Brands claims that the litigation is meritless and plans a "vigorous" defense -- but they also add that the situation could harm shareholders by diverting time and resources away from core operations.
Genius Brands' revenue grew 21% to $560,679 in the second quarter, but loss from operations expanded from $1.67 million to $2.38 million after a surge in general and administrative expenses because of surging salaries, stock-based compensation, and legal fees. Genius Brands sustains this cash burn through equity dilution. Shares outstanding grew from 10.99 million to 219.03 million year over year -- bad news for existing shareholders, because the company doesn't seem to be using the capital to create value for investors.
Like Genius Brands, Eastman Kodak stock enjoyed a short-lived surge in popularity. In July, shares spiked by over 2,000% to a 52-week high of $60 after the company earned a defense production loan to make pharmaceutical starting chemicals -- but now the stock trades around $8.47 amid an SEC probe into potential insider trading and failing core operations.
Investors should avoid Kodak until these challenges are addressed.
Both the U.S. House of Representatives and the Securities and Exchange Commission are investigating Kodak and its board for issuing stock options to management before making news of the $765 million loan public. The loan originator, the U.S. International Development Finance Corporation, has placed the funds on hold until these allegations are resolved, which means the future of Kodak's drug business is uncertain.
The good news is that an internal company probe has cleared Kodak of wrongdoing. But this comes with potential conflicts of interest, because the company's board itself hired the law firm that made that determination.
Investors should take a close look at Kodak's commercial printing business, because this will be what's left if the pharmaceutical strategy falls through. The business is struggling. Second-quarter revenue fell 31% to $213 million, and the company reported a $5 million net loss compared to a net income of $201 million in the prior-year period. Losses could accelerate if sales continue to decline, and management expressed substantial doubts about the company's ability to continue as a going concern in its 2019 annual report because of these challenges.
Don't be a bagholder
The fact that a company ranks high on Robinhood's list of its most popular stocks doesn't make it a good bet. Genius Brands and Eastman Kodak have historically struggled to create value for investors, and they both face legal challenges related to potential misconduct. Investors should think twice about these risky stocks.