Over the past year, volatility has been the friend of millennial investors. We know this because online investing app Robinhood, which is known for its commission-free trades and gifting of free shares of stock to new members, gained roughly 3 million new users in 2020. The average age of Robinhood's member base is only 31.
While it's great to see young investors putting their money to work in the world's greatest wealth creator, it's evident that many fail to understand the importance of long-term investing or compounding. Robinhood's leaderboard (i.e., the 100 most-held stocks on the platform) is packed with penny stocks, momentum names, and otherwise awful businesses.
After perusing its ever-changing leaderboard, the following five companies stand out as Robinhood's most dangerous stocks.
There's no way a list of Robinhood's most dangerous stocks isn't going to include video game and accessories retailer GameStop (GME 0.40%), which has been whipsawed by retail investors for more than a month.
Retail investors on Reddit's WallStreetBets (WSB) chatroom were primarily responsible for sending GameStop higher by nearly 900% on a year-to-date basis (based on after-hours trading on Feb. 24). Retail investors have agreed to work together to purchase shares and out-of-the-money calls on heavily short-sold stocks, with the purpose of effecting a short squeeze. Since GameStop is the most short-sold stock of any publicly traded company (as a percentage of its float), it made for a logical target by the WSB community.
The fundamental problem for GameStop is that management waited far too long to take a digital approach to gaming. Even with e-commerce sales up by triple digits during the holiday season, the company's total sales continue to fall. GameStop's plan of attack for now is to close stores in order to cut expenses and backpedal its way back into the black. More than likely, it will report its fourth consecutive annual loss this year.
2. Inovio Pharmaceuticals
Another dangerous Robinhood stock that investors would be smart to avoid is clinical-stage drug developer Inovio Pharmaceuticals (INO 23.81%).
Inovio initially caught fire last year as one of the drug developers expected to lead in coronavirus disease 2019 (COVID-19) vaccine development. It caught a second wind earlier this year when the WSB community selected Inovio as one of its stocks to target. Inovio has a relatively high level of short interest, which made it the perfect target for a short squeeze.
But Inovio didn't make it onto this list by accident. The company's COVID-19 vaccine had a partial clinical hold placed on its phase 2/3 trial by the U.S. Food and Drug Administration (FDA) back in late September. Even though the partial hold on the phase 2 portion has been lifted, the FDA is requesting additional information on its vaccine and delivery device, known as Cellectra. As of now, the phase 3 hold remains in effect.
Furthermore, Inovio hasn't had any of its clinically developed therapies approved by the FDA in four decades. The track record here speaks loud and clear: Avoid this stock.
3. Riot Blockchain
Cryptocurrency miners are people or businesses that use high-powered computers to solve complex mathematical equations, thereby validating groups of transactions (known as blocks). For doing this on Bitcoin's network, a block reward of 6.25 tokens is paid. That's worth more than $300,000 at today's prices. For young investors, Riot Blockchain is viewed as a quick and easy way to play Bitcoin's ascent.
However, Riot Blockchain is facing a host of issues that makes its current valuation unsustainable. For instance, the crypto mining space is growing more crowded over time, and Bitcoin's block rewards halve every couple of years. What's more, Riot has big upfront costs to purchase mining equipment and ongoing costs to maintain it. Instead of innovation driving growth, shareholders are completely at the mercy of the price of Bitcoin.
Considering that Bitcoin declined 80% on three separate occasions in the previous decade, it's not even clear that crypto mining is a sustainable business model.
4. AMC Entertainment
AMC's skyrocketing share price since the year began is the result of the company raising enough capital to stave off bankruptcy, as well as the Reddit community piling into a penny stock with high levels of short interest. There's also optimism that the reopening of the U.S. economy in key states will lead to a rush of consumers back to movie theaters.
The concern is that there's no guarantee society will get back to normal anytime soon. The proliferation of coronavirus variants and vaccine holdouts threaten to slow the achievement of herd immunity in the U.S.
Additionally, streaming operators present a threat to the traditional movie theater operating model. With AT&T's WarnerMedia set to release its new movies on HBO Max at the same time they'll hit theaters in 2021, the long-term outlook for movie theater operators like AMC is squarely in focus.
5. Sundial Growers
One notch below AMC Entertainment at No. 4 on the Robinhood leaderboard is Canadian marijuana stock Sundial Growers (SNDL 5.95%). Although cannabis promises to be one of the fastest-growing industries of the 2020s, this isn't a pot stock you'll want anything to do with.
While some of the bullishness surrounding Sundial has to do with the possibility of the U.S. legalizing cannabis under the Biden administration, most of Sundial's upside in February was the result of the WSB community piling into a highly liquid penny stock. Unfortunately, there's little substance behind this move.
The most dangerous thing about Sundial is its management team. Hell-bent on raising cash, Sundial has buried shareholders in dilution. Following countless share offerings and debt-to-equity swaps, Sundial now has an estimated $680 million in cash, but has issued more than 1.1 billion shares in five months. In more than two decades of covering equities, I've rarely witnessed dilution this profound.
The icing on the cake is that Sundial's decision to shift its operating model from wholesale to retail will ensure it continues to lose money for the foreseeable future. In one of the fastest-growing industries on the planet, Sundial is going in reverse.