When stock market volatility strikes, the nail-biting often begins. But that's not been the case for millennial and/or novice investors. These young investors have been attracted like magnets to the market's volatility over the past year, and apparently the perception of getting rich quick.
Online investing app Robinhood, which is known for offering commission-free trades, fractional share investing, and gifts free shares of stock to new members, have been particularly adept at luring millennial investors. The average age of its user base is only 31, and Robinhood added an estimated 3 million new members last year.
While it's great to see young people putting their money to work in the world's greatest wealth creator, it's also terrifying to see the companies they've been buying. Instead of buying brand-name or innovative businesses, millennials and novice investors have been chasing momentum plays and penny stocks. Suffice it to say, Wall Street doesn't think too highly of their choices.
According to Wall Street, three of the eight most-held Robinhood stocks could fall at least 69% over the next year, if consensus one-year price targets prove accurate.
Sundial Growers: Implied downside of 77%
Though it rocketed up Robinhood's leaderboard in a matter of months, and is now the fourth most-held stock on the entire platform, Canadian marijuana stock Sundial Growers (SNDL 4.78%) is being projected by Wall Street to lose 77% of its value over the next 12 months.
Shares of Sundial have catapulted over the last four months from a combination of two catalysts. First, there's growing optimism that the U.S. might legalize cannabis at the federal level. Joe Biden's victory in November, followed by the Democrats taking back the Senate in early January, offers hope that reform legislation could reach the Senate floor this year. Legalization would allow Sundial and its peers to enter the more lucrative U.S. weed market.
The other key driver for Sundial is the retail investor-fueled Reddit rally. Members of the WallStreetBets (WSB) chatroom on Reddit effectively banded together to buy shares and out-of-the-money call options on heavily short-sold companies or penny stocks. Sundial primarily falls into the latter category.
While it's had an excellent four-month run, Sundial lacks the characteristics long-term investors are typically looking for in a company. For instance, even though it's sitting on an estimated $680 million in cash (this figure takes into account Sundial's recent investment in Indiva and the exercising of 98.3 million warrants), management completely disregarded wealth creation by drowning investors in more than 1.1 billion new outstanding shares since the end of September. With approximately 1.66 billion shares, it's going to be almost impossible for Sundial to generate a meaningful profit or exit penny stock territory.
Furthermore, the company's management team made the decision to move away from wholesale cannabis and toward higher-margin retail operations. With the shift ongoing, Sundial's year-over-year sales comparisons have fallen off a cliff. Sundial has also endured a couple of sizable writedowns.
Penny stocks are usually priced low for a reason, and Sundial Growers is a perfect example of that.
AMC Entertainment: Implied downside of 69%
One notch above Sundial Growers on Robinhood's leaderboard is movie theater chain AMC Entertainment (AMC 8.09%). Unfortunately, popularity doesn't always equate to profits on Wall Street. Robinhood's third most-held stock is expected to decline by 69% over the next 12 months.
This dire projection from Wall Street comes after AMC nearly quadrupled since mid-January. Fueling AMC's historic rise are three catalysts. First off all, the company raised $917 million between mid-December and mid-January, which took the prospect of bankruptcy off the table -- at least for now.
Secondly, there's growing optimism that the U.S. economy will meaningfully reopen in the second-half of 2021. As of this past weekend, there are now three emergency-use authorized coronavirus disease 2019 (COVID-19) vaccines. We've also seen New York lay out a plan to open most of their theaters by the end of this week.
Third, AMC is one of the heavily short-sold stocks that was targeted by the WSB community, beginning in late January. It also happened to be a penny stock at the time, which only added to its lure with retail investors.
The concern here is that AMC Entertainment may not survive much longer. Even though it was able to raise more than $900 million by selling stock and issuing debt capital, this cash probably won't be enough to see AMC into 2022. The company is entirely reliant on COVID-19 letting up and the U.S. economy reopening with minimal restrictions. That's a precarious bet with COVID-19 variants being discovered and a sizable percentage of the population either refusing the vaccine or taking a wait-and-see approach.
Even if AMC were to survive the COVID-19 pandemic, it might be fair to say that the good old days are gone. AT&T subsidiary WarnerMedia is releasing all of its new movies on HBO Max the same day they're scheduled to hit movie theaters in 2021. This could set a new precedent for content consumption in the U.S., and it's not good news for AMC.
GameStop: Implied downside of 87%
Finally, the disaster du jour of Robinhood's leaderboard is video game and accessories retailer GameStop (GME 3.87%). The eighth most-held stock on the platform is projected by Wall Street to lose a whopping 87% of its value in the coming 12 months.
Maybe the craziest thing about GameStop more than quintupling in value in a matter of weeks is that it's come close to losing 80% of its value since hitting nearly $500 a share in premarket trading in late January. This monster rally has been driven almost entirely by the WSB community. After all, GameStop is the most heavily short-sold stock, as a percentage of float, and was therefore the poster child of the retail investor frenzy.
Optimists could also point to GameStop's mid-January holiday sales results as a source of share price upside. In particular, comparable-store sales were up 4.8% during the 2020 holiday season from the prior-year period, with total e-commerce sales catapulting 309%.
Then again, there's a lot for fundamentally focused investors to not like about GameStop. Topping the list is its extremely late transition to digital gaming. Having built itself up for decades as a brick-and-mortar gaming chain, GameStop is now having to scramble to stay relevant. Even with a 309% increase in e-commerce sales during the holiday season, total sales still declined by 3.1%. That's because the company closed 11% of its stores from the previous holiday season. At the moment, closing underperforming physical stores tops the company's strategic plan.
More than likely, GameStop is looking at its fourth consecutive year of annual losses in 2021, albeit its sales might finally stabilize. However, none of this would merit sustainable gains of 400% or 500%. Eventually, the euphoria surrounding GameStop will die down, and those left holding the bag at triple-digit buy-ins are unlikely to be happy campers.