Most investors aren't big fans of heightened periods of volatility. But that's not the case for millennial and novice investors, as evidenced by online investing app Robinhood.
Last year, Robinhood picked up about 3 million new users. That's notable given the average age of its users is only 31. Robinhood's commission-free trades, fractional share investing, and gifting of free shares of stock to new members, have all worked effectively to lure in young investors.
While it's fantastic to see young people putting their money to work in the world's greatest wealth creator, many Robinhood users fail to understand the importance of long-term investing. As a result, the platform's leaderboard (the 100 most-held stocks) is primarily filled with penny stocks and less-than-desirable momentum plays.
Most of the time, Robinhood's most-held stock is a solid company
Perhaps the one exception to this rule has been Robinhood's most-held stock. More often than not, the most-held stock on the platform has been a profitable and/or innovative company that offers substantial long-term growth or value.
For example, with the exception of a few days, tech kingpin Apple (AAPL 4.08%) has consistently been the most-held Robinhood stock for months. Apple is one of the most-recognized brands in the world, and it debuted its first 5G-capable iPhone just shy of three months ago. Even though CEO Tim Cook is overseeing a shift to high-margin services, iPhone is still the single largest revenue generator for Apple. In short, it's a cash flow machine that's constantly on the leading edge of innovation.
For a brief time in January, we also witnessed Tesla Motors (TSLA 7.33%) ascend to the No. 1 spot on Robinhood's leaderboard. While I'm not a huge fan of Tesla's valuation, it's clearly done something right to prove me so wrong. The electric-vehicle (EV) giant delivered nearly 500,000 vehicles last year, and its Battery Day event in September outlined the ways its batteries will retain capacity, range, and power advantages over its peers. For the time being, Tesla's first-mover advantage in U.S. EV's appears safe.
Even Ford (F 3.89%) once found itself as the most-held stock on Robinhood. While this might have been a function of the app gifting free shares of Ford to new members, this is a company that does offer long-term growth at a reasonable price. Ford has a recognizable brand-name with over a century of history, and it's spending $11 billion between 2018 and 2022 to research and build a lineup of EVs. Given its existing infrastructure and history of profits, Robinhood investors are wise to invest in Ford.
Here's the stock that dethroned Apple
But there's a brand-new company that's brushed aside Ford, Tesla, and finally Apple, to become the new most-held stock on the platform, as of Feb. 4: AMC Entertainment (AMC 17.99%).
No, I'm not kidding. Movie theater chain AMC Entertainment is held by more Robinhood users than any other stock listed on a major U.S. exchange.
If the name rings a bell, it's probably because AMC is the sidekick to GameStop in the Reddit-based retail investor rally we've witnessed in recent weeks. Both GameStop and AMC have high levels of short interest (i.e., investors who want to see their share prices fall). Knowing this, retail investors on the WallStreetBets investing chatroom on Reddit banded together to buy shares and out-of-the-money call options on both companies. In AMC's case, it pushed shares of the company higher by a cool 525% in January. As noted earlier, Robinhood users love momentum stocks.
The interest in AMC has also been partially sparked by the company securing $917 million in funding in late January. It raised $506 million between mid-December and late January by issuing common stock, and secured another $411 million through debt capital. With the coronavirus disease 2019 (COVID-19) pandemic closing movie theaters or significantly reducing foot traffic, this capital infusion will allow AMC to make it through the winter.
AMC is an absolute eyesore
Unfortunately, the new No. 1 stock on Robinhood is an absolute eyesore that simply shouldn't be in investors' portfolios.
Let's not forget that prior to being the apple of day-traders' and retail investors' eyes, AMC was practically on the edge of bankruptcy. The only way it was able to avoid bankruptcy was to add debt and issue a boatload of dilutive shares. It's worth noting that AMC's recent share price surge has the company considering another share offering to raise additional capital.
AMC's core operating model also looks seriously flawed in two respects. First, it's unclear when the COVID-19 pandemic is going to abate. The recent rally in AMC stock would suggest that the current vaccination campaign will go off without a hitch, and life will return to normal by mid-year. However, surveys suggest otherwise, with a recent Kaiser Family Foundation poll showing that close to half of all respondents are in wait-and-see mode or simply don't want the vaccine.
The other major issue is that movie theaters' monopoly of new films may be coming an abrupt end. In December, AT&T (T -0.14%) subsidiary WarnerMedia announced that it would release all of its new movies in 2021 on HBO Max the same day that they're set to appear in movie theaters. AT&T saw a sizable spike in HBO Max subscribers before this announcement, and I wouldn't be shocked if that momentum continued throughout December and into the new year. The point is, consumers may prefer the comfort of their couch to the ambience of a movie theater.
AMC has no business being the most-held stock on Robinhood, and I can only hope millennial and novice investors wise up about this company before it's too late.