This has been a year filled with uncertainty, and it's led to record-breaking volatility on Wall Street. Although things may look relatively calm now, the broad-based S&P 500 registered its fastest bear-market drop ever in March, and the index has logged 10 of its largest single-session point declines in history since the year began.
While these wild stock market swings have been unnerving for some folks, they've proved to be an insatiable lure for millennial and novice investors. We know this because online investing app Robinhood has added millions of new members in 2020, and the average age of its user base is only 31.
Though it's great to see young investors putting their money to work in the stock market, many Robinhood users have chosen to chase penny stocks or downright awful companies. As a result, quite a few of the most popular Robinhood stocks are hated by Wall Street. This was especially evident during the third quarter, with money managers running for the exit from the following three stocks.
Electric-vehicle (EV) manufacturer Tesla Motors (TSLA 4.72%) has been virtually unstoppable over the past decade. CEO Elon Musk has successfully built the first auto company from the ground up to mass production in over five decades, and the stock has rewarded shareholders with a nearly 7,800% gain over the trailing-10-year period.
However, optimism surrounding Tesla and its lofty valuation appears to be waning among professional money managers. During the third quarter, aggregate ownership by Form 13F filers decreased by 18.2%, or more than 87 million shares.
If you're wondering why professional money managers aren't as enthused about Tesla anymore, I'd look to the company's income statement. With funding no longer a concern, the real issue has been Tesla's inability to generate a full-year generally accepted accounting principles (GAAP) profit, and its reliance on selling emission credits to generate revenue. Put another way, Tesla's not been profitable without the assistance of (legal) accounting trickery. A market cap north of $500 billion for a company that's not even shown the ability to generate an old-fashioned profit might be causing some folks to think twice about mashing the accelerator to the floorboard.
It's also unclear whether Tesla's first-mover advantages will be sustainable over the long run. Other brand-name auto stocks are investing billions annually into EVs and/or autonomous driving solutions. From style to battery technology, it could be difficult for Tesla to maintain its U.S. EV dominance for much longer.
American Airlines Group
Another exceptionally popular Robinhood stock that Wall Street money managers showed the door in the third quarter is American Airlines Group (AAL -0.21%). The beleaguered airline stock saw aggregate 13F ownership decline by 5.3%, or 15.1 million shares, in Q3.
Whereas Tesla is defying gravity with its innovation, the old-school airline industry remains mostly grounded, with American Airlines looking like the worst of the bunch. This is a company that made the decision to modernize its fleet in 2018 and retire dozens of commercial planes well before their useful lifespan was up. As a result, American Airlines' balance sheet was, again, buried by debt.
The company's poor financial flexibility was only magnified by the COVID-19 pandemic. With air traffic well below where it stood when the year began, and no clear time frame as to when people will again take to the skies, this high-capital-input, low-margin industry is hanging on by thread and producing massive losses in the process. This industry simply isn't capable of navigating its way through extended economic declines.
What money managers are fleeing is a company with nearly $33 billion in net debt that's suspended all dividends and share buybacks. Even if American Airlines avoids bankruptcy, it'll be hamstrung by its debt for many years to come.
Wall Street money managers have also shunned brand-name chipmaker Intel (INTC 5.84%). Despite the stock being popular with millennial investors, 13F filers reduced their sequential quarterly holdings in Intel by approximately 159 million shares, or 5.8%, during the third quarter.
Similar to American Airlines, COVID-19 has really done a number on Intel's core operating segments. Though it's seeing very modest growth from personal computing and workstation chip demand, revenue from its Data Center Group has stumbled badly (down 10% from the prior-year quarter). Demand uncertainty stemming from COVID-19, market share losses to key rival Advanced Micro Devices, and the expectation of more modest order growth from cloud service providers hasn't sat well with Wall Street.
Yet unlike Tesla, which doesn't have a proven, time-tested business model, and American Airlines, whose business model is disrupted with even the slightest economic headwind, Intel has demonstrated the ability to remain very profitable in adverse economic conditions. Intel is investing heavily in its future, with the company expecting demand to increase dramatically from its higher-margin data center segment in the years to come. Even the memory and programmable solutions divisions offer decent long-term growth prospects.
So even though Intel has been a disappointment in 2020 and its high-growth days are long gone, it's now priced at roughly 10 times Wall Street's per-share profit forecast for 2021. That's a reasonable valuation when coupled with a yield of close to 3%. Assuming Intel's growth strategy pivot begins paying off by mid-decade, this is one Robinhood stock Wall Street is going to regret selling.