In 2020, Wall Street and investors were taken on a historic roller-coaster ride. They navigated the quickest bear market decline of at least 30% in history, and then enjoyed the quickest bounce-back rally to fresh all-time highs on record.
What might surprise you is that this wild volatility has continued into 2021, albeit in a different form. Instead of the coronavirus disease 2019 (COVID-19) pandemic, it's predominantly young retail investors on Reddit's WallStreetBets (WSB) chatroom and millennial Robinhood users causing Wall Street's wild swings.
In particular, young investors on online investing app Robinhood can't stop chasing penny stocks (companies with a share price under $5). As of Monday, Feb. 15, the following five penny stocks were the most held on its platform.
Though I find this mind-boggling, Canadian marijuana stock Sundial Growers (SNDL 5.41%) is the third most held stock on Robinhood. More investors have chosen to put money into Sundial than into great companies like Amazon, Microsoft, and Walt Disney.
Since the end of October, Sundial has been the mother of all momentum stocks, with a gain of 1,350%. The company has cleaned up its balance sheet and increased its cash and cash equivalents on hand to about $610 million. If the U.S. does decide to legalize cannabis at the federal level, it would give Sundial plenty of capital to put to work when entering the U.S.
However, I'd opine that investors' love of Sundial is grossly misplaced. We're talking about a company that issued over 1 billion shares in roughly four months via share offerings and debt-to-equity swaps. Yes, it has plenty of cash, but it absolutely trampled existing shareholders to build up its war chest.
Furthermore, Sundial Growers is transitioning from a lower-margin wholesale cannabis operating model to one that focuses on higher-margin retail. While I don't disagree with this move, it's going to come with declining year-over-year sales comparisons and ongoing losses in the interim.
Perhaps just as maddening is telecom equipment provider Nokia (NOK 3.00%), which is the eighth most held stock on Robinhood (also above Amazon, Microsoft, and Disney).
In recent weeks, retail investors on WSB have sunk their teeth into a number of heavily short-sold companies in an effort to effect a short squeeze. A short squeeze is designed to send pessimists scurrying for the exit, which can push momentum stocks even higher. It worked with the highly liquid Nokia for a few days, sending shares of the company up over 100%. However, Nokia has since given up all of its Reddit-fueled gains.
The fact of the matter is that Nokia isn't an exciting investment opportunity. Penny stocks often have a low share price for a good reason, and Nokia is the perfect example. As my fellow Fool Leo Sun noted recently, Nokia spent so much time trying to backpedal to higher operating margins following its acquisition of Alcatel-Lucent that it forgot to lead with innovation. As a result, its share of the telecom equipment market is on the decline, and it's falling behind other 5G equipment providers during an important infrastructure upgrade cycle.
Although Nokia is at least profitable, Wall Street expects both its sales and earnings to decline in 2021.
The third most popular penny stock on Robinhood, and 13th most held company on the entire platform, is clinical-stage veterinary drug and diagnostics developer Zomedica (ZOM 5.23%). Over the trailing three months, shares of Zomedica are up over 2,600%.
Zomedica's skyrocketing stock can be attributed to two head-scratching catalysts. It first received a huge boost in mid-January when Tiger King star Carole Baskin promoted Zomedica in a video shared online. The company received a second lift when retail investors caught onto its momentum. If you're noticing a theme here, it's that millennials and novice investors love to chase momentum stocks.
There is good news for Zomedica beyond the fluff. The company plans to launch its point-of-care Truforma diagnostic system for cats and dogs on March 30. This will give the company a way to generate recurring revenue. It also closed $173.5 million in bought-deal financing on Feb. 11, which will eliminate any funding concerns.
Then again, Zomedica is sporting a nearly $2.4 billion valuation and looks unlikely to achieve even $20 million in sales prior to 2023. Most drug or device developers are lucky if they're valued at 6 to 8 times peak sales. Zomedica is sporting a price-to-sales ratio of over 100 when looking three years into the future. This valuation doesn't look sustainable.
Just like Sundial, OrganiGram's investors are excited about the possibility of a Democrat-led Congress reforming cannabis at the federal level in the U.S. The U.S. should have up to $41.5 billion in annual weed sales potential by 2025, according to New Frontier Data. Legalization would widen OrganiGram's opportunity considerably.
OrganiGram was also recently caught up in the WSB retail investor frenzy with a number of other pot stocks.
But unlike the other companies listed here, OrganiGram is a penny stock that investors can consider buying with confidence. It only has one cultivation facility (Moncton, New Brunswick), which makes adjusting its supply chain to match prevailing market conditions relatively easy. OrganiGram also maximizes its indoor licensed rooms by utilizing a three-tiered growing system. This should result in higher yields per square foot.
What's more, OrganiGram has invested heavily in high-margin derivative products, such as edibles and powders. Its future looks bright compared to these other penny stocks.
Naked Brand Group
Last but not least, intimate apparel and swimwear retailer Naked Brand Group (NAKD) is the fifth most popular penny stock on Robinhood, and one notch behind OrganiGram (No. 23) on the leaderboard.
Naked Brand's recent momentum has to do with the WSB-fueled attack on heavily short-sold stocks. Naked Brand's short interest has risen dramatically. Since it also happens to be a low-priced stock, it's been nothing short of a bull's-eye for retail investors.
The only noteworthy press out of Naked Brand Group that could justify any bullishness was a Jan. 21 announcement that it would be divesting its unprofitable brick-and-mortar operations in favor of focusing on e-commerce and merger and acquisition opportunities. Not having a physical store presence should help lower the company's overhead costs in an increasingly digital retail environment.
The problem is that Naked Brand hasn't done much of anything to justify its share price more than tripling over the past month. It's lost money in at least six consecutive fiscal years, and sales have been on the decline since fiscal 2018. This is the perfect example of a penny stock deserving its low price.