When the curtain finally closes on 2020, it'll go down as one of the most volatile years on record for the stock market. We watched the CBOE Volatility Index hit an all-time high and witnessed the quickest bear market decline of at least 30% in the S&P 500. It took less than five weeks for the index to lose a third of its value.
For investors with a long-term mindset, these declines have been blessings in disguise. Since bull market rallies eventually erase all stock market corrections, long-term investors can use sizable declines in equities as opportunities to put their money to work.
However, big swings in the stock market also tend to attract millennial or novice investors with visions of getting rich quick.
Online investing app Robinhood, which you might know best for offering commission-free trades and giving free shares of stock to new members, has been particularly successful at luring these young investors. Since the year began, Robinhood has added millions of new members, and the average age of its user base is only 31.
On the one hand, young people putting their money to work in the greatest wealth creator on the planet is fantastic. On the other hand, Robinhood isn't providing the tools or education needed to help these millennial and novice investors understand how important compounding and long-term investing can be. Robinhood's leaderboard (the 100 most held stocks on the platform) is filled with awful companies because its members are focused on Wall Street's flavor of the week.
As we barrel headlong into November, three popular Robinhood stocks stand out as being particularly avoidable.
Investors would be wise to keep their distance from commercial airplane manufacturer Boeing (BA 0.39%) for the foreseeable future.
Boeing has been hit hard on two fronts over the past two years. First, in March 2019, the company's next-generation 737 MAX was grounded worldwide following two fatal crashes. Updating software issues with the 737 MAX has been slow. The incidents and the aftermath clearly hurt its reputation within the airline industry.
The second issue is the coronavirus disease 2019 (COVID-19) pandemic. I'm not just picking on Boeing; COVID-19 is hurting a lot of companies. However, the pandemic has hit the airline industry particularly hard. All of the major airlines, and many regionals, have been forced to take on additional debt to ensure they have enough liquidity to survive this economic downturn. It's unknown when air travel will return to pre-pandemic levels. Airlines are now lugging around cargo holds of debt and the industry is facing a glut of commercial planes. These factors spell bad news for Boeing.
If there's a positive, it's that the company's defense segment is holding up relatively well, with only a 3% decline in revenue through the first nine months of 2020. But the defense segment alone isn't going to be enough to offset historical weakness in Boeing's bread-and-butter commercial airline division, which has experienced a 54% slide in revenue through Q3 2020.
There may come a time when Boeing deserves a closer look from long-term investors, but I suspect we're many years from that point.
Young investors love marijuana stocks. Unfortunately for Robinhood investors, they're not able to buy any stocks that trade on the over-the-counter exchange. They're missing out on North America's top performers and are stuck investing in poor-performing Canadian licensed producers like Tilray (TLRY).
Tilray is contending with some issues that are admittedly beyond the company's control. Canada was the first industrialized country in the modern era to greenlight adult-use cannabis, but regulators badly botched the rollout of pot products. Health Canada was slow to approve cultivation and sales licenses and delayed the launch of higher-margin derivative products by a few months. Meanwhile, select provincial regulators (ahem, Ontario) have slowed dispensary openings, leading to supply bottlenecks.
But Tilray deserves its fair share of finger-pointing as well. Last year, Tilray acquired hemp foods company Manitoba Harvest for its lucrative 16,000-door distribution network. It was expected that Tilray would use this network to sell cannabidiol (CBD) products throughout North America. However, after the U.S. Food and Drug Administration put its foot down on CBD as an additive to food and beverages in November 2019, the CBD hype cooled. In hindsight, Tilray grossly overpaid for Manitoba Harvest.
Perhaps even more worrisome is that Tilray doesn't appear to have a cohesive strategy. CEO Brendan Kennedy noted in March of last year that he intended to focus Tilray's future investments outside of Canada. While international sales more than quadrupled to $8.3 million in the June-ended quarter, shifting the company's focus from Canada to global markets meant introducing a lot of new costs. Tilray has been losing money hand over fist, and that's not going to change anytime soon.
As one final note of caution, Tilray has been forced to issue stock to raise capital. It's unclear if it will survive over the long run.
The final extremely popular stock on Robinhood that should be avoided like the plague is electric vehicle (EV) manufacturer Nikola (NKLA -4.36%).
It's easy to understand why Nikola is so popular. EVs are the undoubted future of the automotive industry, and investors have watched Tesla lead the way with a 10,000% gain over the past 10.5 years. Like tech investors trying to find the next Apple, auto investors want to own the next Tesla.
The problem is that Nikola is entirely unproven at this point and has to overcome a mountain of criticism. Noted short-side firm Hindenburg Research has already targeted the company. Though it's not uncommon for firms like Hindenburg to hold short positions in the companies they're attempting to expose, the fraud concerns they raised garnered the attention of the Securities and Exchange Commission, which is looking into the matter.
There have been multiple absolutely head-scratching moments since Nikola became a publicly traded company. For example, founder Trevor Milton announced he was stepping down from his role as Executive Chairman in a late-night tweet. His resignation came after two separate allegations of sexual abuse were levied against him.
Even Nikola's potential deal with General Motors (GM 0.51%) is a bit odd. The deal would rely on General Motors to build Nikola's battery-powered Badger pickup truck and provide its hydrogen fuel-cell technology. After Milton built up Nikola's superior technology during company presentations, it's strange that General Motors would be tasked with providing the meat and potatoes of the company's EVs.
There's simply too much that could go wrong for Nikola at this point, making this stock one to avoid.