Stock market volatility has been off the charts for much of 2020, but that hasn't fazed millennial investors one bit. We know this because millions of novice and millennial investors have signed up for a Robinhood account this year.
Online investing app Robinhood is well known for offering commission-free trades, gifting free shares of stock to new members, and allowing fractional share investing. But it's also gained a reputation for its exceptionally young user base, which averages only 31 years in age. While it's fantastic to see young people putting their money to work in the world's greatest wealth creator, many of these users lack the tools or knowledge to successfully invest for their future. As a result, Robinhood's leaderboard (the 100 most-held stocks on the platform) is littered with terrible stocks.
When I say "terrible," you might think I'm exaggerating. But according to Wall Street's consensus price targets, four of the 12 most-held stocks on Robinhood are expected to fall between 16% and 41%.
Image source: Getty Images.
Tesla: Consensus 41% below current price
Electric-vehicle (EV) manufacturer Tesla (TSLA 0.66%) is the second-most-popular holding on Robinhood, and it's galloped higher by well over 600% on a year-to-date basis. But based on Wall Street's consensus price target of $375.66, this innovative auto stock could lose 41% of its value.
There's no denying that Tesla has a lot going for it. The company looks to be on track to deliver north of 500,000 EVs in 2020, and announcements from its Battery Day event suggest that it'll remain the industry leader in battery range and power for some time to come. In other words, Tesla's first-mover advantage continues to strike a chord with car buyers and investors.
Yet, Tesla isn't profitable on a recurring basis solely from selling EVs. The company has regularly relied on selling emission credits to pump up its sales in what's historically been a highly capital-intensive, low-margin industry. While Wall Street is usually willing to overlook profitability for high-growth stocks, I'm not so sure that applies for a company sporting a $608 billion market cap.
Furthermore, all next-big-thing investment bubbles have eventually burst over the past quarter of a century. Whether it was the internet, business-to-business commerce, genomics, blockchain, or cannabis, these bubbles eventually popped when investors came to the conclusion that their expectations far exceeded reality. All industries need time to mature, and that includes EVs.
Image source: American Airlines.
American Airlines: Consensus 36% below current price
Airline stocks have also been blazing hot of late, with American Airlines Group (AAL -0.07%) leading the charge higher. The problem is that the sixth-most-held stock on Robinhood has a consensus price target of $11.08 on Wall Street, which is 36% lower than where its shares are currently trading.
The reason American Airlines has taken flight in recent weeks has to do with Pfizer/BioNTech and Moderna reporting phenomenal coronavirus vaccine efficacy in their respective interim analyses. If enough people take the vaccine, the pandemic could be stopped in its tracks within the next year. That would potentially open the floodgates for global travel.
The thing is, American Airlines is in poor financial shape, even if things go perfectly on the vaccine front. It's taken on a mountain of extra debt during the pandemic to boost its short-term capital, and is now lugging around in excess of $41 billion in debt. Servicing this debt is going to keep American Airlines' growth plans grounded for a long time.
What's more, as a condition for accepting federal COVID-19 assistance, American Airlines can no longer buy back its own stock or pay dividends. Without a capital return program, there are exactly zero reasons for long-term investors to put their money to work in American Airlines' stock.
Image source: Getty Images.
Aurora Cannabis: Consensus 21% below current price
Once the most popular stock on the entire Robinhood platform, Aurora Cannabis (ACB -3.30%) is now the 12th-most-held stock. What should concern investors is that its current share price is 21% higher than Wall Street's consensus price target.
Marijuana stocks, and especially Canadian pot stocks like Aurora, have been on fire in recent weeks following the U.S. election. Speculation is mounting that a more progressive political makeup in Washington, D.C., may push to legalize cannabis at the federal level. If weed were to be legalized federally, Canadian pot stocks would be able to enter the highly lucrative U.S. marijuana market.
This probably all sounds great on paper, but it's highly unlikely to happen. President-elect Biden has no intentions of doing anything more than decriminalizing marijuana and moving it one notch lower on the controlled-substance scale. And without a Democratic Party sweep in the upcoming Senate seat runoffs in Georgia, the idea of cannabis reforms can be kissed goodbye for at least another two years. Translation: Aurora Cannabis isn't entering the U.S. anytime soon.
More specific to Aurora, the company has been an utter train wreck. It's been constantly diluting its shareholders for years, and its previous management team grossly overspent to acquire unnecessary assets. Even with that team now gone, shareholders continue to pay the price for their actions. With profitability still years off, Aurora Cannabis is worth avoiding.
The NIO ES8 SUV. Image source: NIO.
NIO: Consensus 16% below current price
EV stocks are red-hot at the moment, with China-based NIO (NIO -0.36%) climbing to the No. 7 spot on Robinhood's leaderboard. But after gaining over 1,000% on a year-to-date basis, NIO's share price sits 16% above Wall Street's consensus price target for the company.
The optimism surrounding NIO is tied to the company's focus on the Chinese auto market. China should be the world's leading consumer of EVs, thereby giving NIO a clear path to gobble up share in a nascent market. NIO also delivered approximately 22,500 of its premium EV SUVs over the last two quarters, which sent sales soaring and pushed its gross vehicle margin into the black. After watching Tesla return over 10,000% in 10 years, investors appear to have anointed NIO as Tesla 2.0.
But NIO's $61 billion market cap is now almost equal to General Motors -- a profitable company that can produce as many vehicle as NIO did in all of 2019 in a single day. Companies like GM, Ford, Tesla, and a host of other major auto stocks are investing billions into EVs and autonomous vehicle production. In other words, NIO will not have an easy ride in China.
Additionally, NIO is still quite far away from reaching recurring profitability. As noted, the auto industry doesn't generate high margins, and NIO will be busy reinvesting in capacity expansion and innovation. Though cash is no longer a concern, it's unclear when the company will report profits and cash flow that even come close to supporting a $61 billion valuation.
