For the past couple of weeks, retail investors on Reddit's WallStreetBets chatroom have ruled the roost on Wall Street. These retail investors have effectively come together to buy shares and out-of-the-money call options in heavily short-sold companies or penny stocks, driving their share prices into the stratosphere. They've sent institutional and hedge fund managers scurrying for the exit.
While it's been amusing to see the little guy get some limelight on Wall Street, it's worth pointing out that these Reddit-fueled rallies have little or no substance behind them. If you need proof, just take a closer look at two of retail investors' favorite targets recently, Sundial Growers (SNDL 11.07%) and AMC Entertainment (AMC 8.03%).
Canadian marijuana stock Sundial Growers is sitting on a mountain of cash ($610 million), but improved its balance sheet by stepping all over the company's existing shareholders. Following multiple share offerings and debt-to-equity swaps, Sundial has issued over 1 billion shares since the end of September. If that's not enough, year-over-year net sales declined by 54% in the latest quarter, with the company transitioning toward the retail side of the cannabis market.
As for AMC Entertainment, retail investors piled in shortly after the company announced it raised $917 million to avoid bankruptcy. In mere days, AMC went from what looked like a goner to a $6.5 billion market cap. It's unclear how the pandemic will pan out, and streaming content providers have totally disrupted the movie theater operating model. AT&T subsidiary WarnerMedia is releasing all of its movies in 2021 on HBO Max the same day they'll hit theaters.
Retail investors are chasing some really bad companies with poor operating outlooks, to put it mildly. My suggestion is simple: Trade up to higher-quality businesses. The following three stocks are all markedly better companies that will offer investors much more impressive long-term returns.
Great companies remain great for a long time. That's why, even with its stock near an all-time high, Alphabet (GOOGL -0.14%) (GOOG -0.07%) makes for a much smarter buy than AMC or Sundial. Alphabet is the parent company of Google and YouTube.
Internet search giant Google is the most obvious part of Alphabet's appeal. According to GlobalStats, Google's share of worldwide search has vacillated between 91% and 93% for more than a year. That's bordering on monopoly status and suggests that businesses will pay up for prime placement on Google's search platform. Even faced with the worst recession in decades, Google Services (primarily ads) saw revenue jump 11% in 2020 to $168.6 billion.
It's not just search that offers fantastic long-term growth prospects. Streaming platform YouTube has become one of the three most-visited social sites on the web. YouTube's Q4 ad revenue of $6.9 billion suggests an annual run-rate nearing $28 billion.
Meanwhile, Google Cloud revenue surged to $3.8 billion in Q4 from $2.6 billion in the year-ago quarter. Cloud infrastructure services usually generate much higher margins than advertising revenue. That means Google Cloud is Alphabet's best bet for a big uptick in operating cash flow over the next five years.
GrowGeneration has 42 retail locations across 11 states that sell hydroponic and organic gardening products. While GrowGeneration isn't only focused on cannabis companies, the products it carries are perfect for indoor growers and cultivators to improve yield and protect their crops from pests. Considering that 36 states have greenlighted medical marijuana in the U.S., GrowGeneration's market opportunity just keeps expanding.
Speaking of expansion, GrowGen is delivering on both the organic and inorganic sides of the aisle. The company's full-year operating results preannouncement in mid-January stated that it grew same-store sales by a whopping 63% in 2020, with total revenue up 140%. Acquisitions have played a key role in GrowGen's expansion, and will continue to do so moving forward. The company aims to end 2021 with 55 open locations.
With back-to-back years of triple-digit growth under its belt and the midpoint of the company's sales guidance for 2021 calling for 78% sales growth, GrowGeneration appears to have all the tools needed to make investors rich.
Compared to the recently volatile AMC and Sundial, pharmaceutical stocks are tape-your-eyelids-open boring -- but boring businesses are often moneymakers. That's why big pharma stock AstraZeneca (AZN -1.38%) should be on your buy list.
Like most pharmaceutical stocks, AstraZeneca was pounded in the previous decade as key therapies lost their exclusivity and generics flooded the market. Thankfully, we're well past the patent cliff, and AstraZeneca's product portfolio is looking as robust as ever. In particular, oncology sales were up 24% on a constant-currency basis in 2020, with blockbusters Tagrisso, Imfinzi, and Lynparza delivering constant-currency sales growth ranging from 36% to 49%.
Beyond just oncology, AstraZeneca secured itself a mountain of recurring cash flow with the $39 billion pending cash-and-stock acquisition of Alexion Pharmaceuticals (ALXN). Alexion focuses on extremely rare diseases, meaning insurers rarely push back on its high list prices, and the company contends with little (if any) competition.
What's more, Alexion developed a replacement (Ultomiris) for its best-selling drug, Soliris. The U.S. Food and Drug Administration approved Ultomiris in 2019. This new therapy, which doesn't need to be administered frequently, improves patients' quality of life and secures Alexion's cash flow for a long time to come.
This article represents the opinion of the writer, who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.