Last year was exceptionally volatile for the stock market -- but that didn't seem to bother young investors who craved these wild vacillations.
Online investing app Robinhood, which has an average user age of only 31, gained approximately 3 million new users in 2020. While it's fantastic to see young people putting their money to work in the greatest wealth creator on the planet (the stock market), it's also unnerving that they aren't being given the proper education and tools to succeed. As a result, some of the most-held stocks on Robinhood's platform look like absolute dumpster fires.
As we enter a new year, four ultra-popular Robinhood stocks have the look of companies that should be avoided like the plague.
Image source: Getty Images.
NIO
Following a better-than-1,100% gain in 2020, electric-vehicle (EV) manufacturer NIO (NIO -3.86%) has worked its way up to the ninth-most-held stock on Robinhood's platform.
In some respects, optimism is warranted. NIO is based in China, which'll be the largest market for EVs in the world. By 2035, roughly half of all new-vehicle sales should be EVs or, to a far lesser extent, hybrids. NIO's deliveries have catapulted higher in 2020, while the company's resolved all of its immediate cash concerns by selling stock. It also introduced a brand-new crossover (EC6) that's quickly become its top-selling vehicle.
However, even with NIO lifting its gross vehicle margin into positive double digits in Q3 2020 from a negative single-digit number in the prior-year period, an $83 billion market cap is a bit much. With NIO's deliveries rocketing to just over 7,000 in December, the company has an annual run rate of only 84,000 EVs. Even if the company's output and sales were to double in 2021, it would still be valued at more than 16 times sales in an industry known for its menial margins.
Furthermore, NIO isn't going to be the only EV manufacturer focused on China. Detroit's big three are investing billions each year into EVs and autonomous vehicles, with a number of other brand-name and established automakers doing the same. Without its own infrastructure to really ramp up production, an $83 billion valuation looks like a serious stretch.
Image source: Getty Images.
Aurora Cannabis
The North American marijuana industry looks set to (pardon the obvious pun) grow like a weed this decade. But not all pot stocks will be winners. Previously the most-held stock on Robinhood and now currently 15th, Canadian licensed-producer Aurora Cannabis (ACB 1.42%) should be avoided like the plague.
At one time, Aurora offered a lot of promise. It had 15 production facilities capable of more than 650,000 kilos of annual cannabis output, if fully operational. The company also had access to two dozen markets outside of Canada. It seemed like a logical winner in a crowded field of pot stocks -- but this wasn't the case.
The biggest issues for Aurora Cannabis were overestimating consumer demand and underestimating regulatory snafus. As a result, it buried its balance sheet in goodwill and intangible assets by grossly overpaying for more than a dozen companies, and had to write off a considerable amount of its inventory.
Aurora Cannabis is facing cash concerns, too. This is a company whose board approved and completed a $400 million and $250 million at-the-market (ATM) offering, and recently OK'd another $500 million ATM offering. Having financed its day-to-day operations and buyouts with its stock, Aurora's share count has ballooned by 11,800% in just over six years. That's a shareholder value-crushing number that makes Aurora worth avoiding.
Image source: American Airlines.
American Airlines Group
One of life's greatest mysteries is why millennial Robinhood investors are infatuated with airlines stocks. Six of the top 32 Robinhood holdings are airlines, with American Airlines Group (AAL 0.96%) taking the highest spot as the platform's No. 5 stock. The problem is, it's probably the worst company within the airline industry.
My best guess as to why American Airlines is flying so high in the minds of young investors is due to its brand-name appeal and beaten-up share price. Presumably, if enough Americans choose to receive a coronavirus vaccine, the country can return to normal and people will again take to the skies. Unfortunately, this thesis has two flaws.
First, we don't have a clue when things will get back to normal, or what normal will even look like. For instance, even with two vaccines being granted emergency-use authorization, the actual vaccination campaign in the U.S. has been slow. Less than 2% of the population (5 million people) have been inoculated, which fell well short of the 20 million people who were targeted for the vaccine in December.
Secondly, American Airlines is going to be strangled by its $41.2 billion in debt for years to come, assuming it avoids bankruptcy. As my colleague Adam Levine-Weinberg pointed out in 2018, American Airlines made the unwise decision to retire commercial planes that had plenty of life left to modernize its fleet. This poor decision coupled with COVID-19 and a complete suspension of its capital-return program make American Airlines wholly avoidable.
A Tesla Model S plugged in for charging. Image source: Tesla.
Tesla Motors
The No. 2 stock on Robinhood's platform, Tesla Motors (TSLA -0.47%), might just be the most overvalued large-cap stock in existence. The bull thesis surrounding Tesla has to do with its first-mover advantages. It fell just 450 vehicles short of 500,000 EVs delivered in 2020. Tesla also offers a clearly identifiable edge over its competition in battery power and range.
But we're also talking about a company with a valuation north of $700 billion that's only producing around a half-million EVs annually. For comparison, Detroit's automakers each have more than two established production facilities and are capable of producing millions of vehicles each year. Tesla's market cap is currently higher than many of the world's most-established automakers on a combined basis.
Additionally, Tesla hasn't shown an ability to generate a profit solely from selling EVs. In four of the past five quarters, selling renewable energy credits has helped push Tesla to a nominal level of adjusted profits. Investors shouldn't have to worry about the recurring profit potential of a company with a $700 billion-plus valuation.
As one last reminder, the auto industry traditionally yields low margins. The EV industry looks like a bubble in the making, with Tesla as the No. 1 stock to avoid in 2021.
