This past week was a clear reminder that volatility is always present in the stock market, and it can pop up when you least expect it. But chances are if you're a millennial or novice investor, you thrive off of volatility.
Last year, online investing app Robinhood, which is best-known for its commission-free trades and gifting of free shares of stock to new members, picked up somewhere in the neighborhood of 3 million new users. This is noteworthy given that the average age of Robinhood's user base is only 31.
Many of these young and/or novice investors have approached the market's wild vacillations as an opportunity to get rich quick. Unfortunately, chasing momentum and penny stocks has left many of these millennials with portfolios that contain awful companies.
Of the 10 most-held stocks on Robinhood's platform, four could conceivably lose half their value, if not more.
Image source: Getty Images.
1. AMC Entertainment
Movie theater operator AMC Entertainment (AMC -3.25%) is currently the third most-held stock on the entire Robinhood platform. As you might already know, AMC has been one of the favorite stocks of Reddit's retail investor-focused WallStreetBets (WSB) chat community. These retail investors have banded together to buy shares and out-of-the-money call options on heavily short-sold stocks like AMC to effect a short squeeze. With AMC, they were highly successful in doing so.
But if you're looking for sustainable, real-world catalysts that could support a large move higher in AMC's stock, you're not going to find any. The big positive for the company in 2021 is simply that it was able to raise $917 million through a combination of share offerings and debt capital to stave off bankruptcy. But this cash may ultimately not prevent the inevitable.
AMC is currently held hostage by the uncertainty surrounding the coronavirus pandemic. Even with a major vaccination effort under way in the U.S., the effectiveness of these vaccines at slowing variants of the disease, along with the willingness of adults to be vaccinated, could determine whether or not movie theaters reopen, and at what capacity.
What's more, AMC Entertainment's operating model is under direct threat from streaming operators. AT&T subsidiary WarnerMedia is releasing all of its films in 2021 on HBO Max the same day they're slated to hit theaters. Walt Disney is making a similar move with some of its releases on its Disney+ service. If consumers prefer the convenience of their couch, AMC's operating model is toast.
Image source: Getty Images.
2. Sundial Growers
Canadian marijuana stock Sundial Growers (SNDL -3.38%), the fourth most-held stock on the platform, could also lose 50% (or more) of its value. Though Sundial's short interest is nowhere near as high as AMC (as a percentage of float), it's become a favorite penny stock among the WSB community.
Aside from relentless social media pumping from retail investors, the most tangible positive for Sundial is its balance sheet. Following the exercising of 98.3 million warrants last months, along with its investment in Indiva, I'd estimate the company has $680 million in available cash. If the U.S. were to legalize cannabis at the federal level, thereby paving the way for Canadian pot stocks to enter the far more lucrative U.S. market, this capital would come in handy.
Then again, Sundial's cash hoard was built on the backs of its shareholders. In a five-month stretch, Sundial's share offerings, exercising of warrants, and debt-to-equity swaps increased the company's outstanding share count by more than 1.1 billion. In more than two decades of investing, it's some of the worst share-based dilution I've witnessed. Worse yet, it's probably not over. The company's board OK'd a shelf offering that would allow the company to issue up to $1 billion in securities over time.
Despite being in a fast-growing industry, Sundial might also be one of the last pot stocks to generate a profit. The company is in the midst of an operating model shift from wholesale cannabis to retail, which puts it well behind its peers at a time when most North American cannabis stocks are turning the corner to profitability.
The NIO EC6 crossover. Image source; NIO.
3. NIO
Electric-vehicle (EV) stocks have been virtually unstoppable for the past year, which is a big reason millennials and novice investors have piled into China-based NIO (NIO 3.49%).
The fifth most-held stock on Robinhood delivered 43,728 EVs in 2020, which is more than double the 20,565 EVs delivered the year prior. It's also on pace to deliver 20,000 to 20,500 EVs just in the first quarter of 2021. Since China is the leading EV market in the world, and projections call for roughly half of all new vehicle sales in 2035 to be some form of alternative energy, NIO could effectively clean up with its innovative lineup.
Then again, we're talking about a company with a $61 billion market cap that's delivered 88,444 cumulative EVs since its inception. Some brand-name auto stocks can produce this many vehicles in a week, or less. With NIO still in the process of ramping up its operations, losses have been and should continue to be an eyesore. Last year, NIO's nearly $813 million loss was a bit bigger than Wall Street had been expecting.
NIO is also expected to face an influx of domestic and foreign competition. That's not great news given that the auto industry generally produces only mediocre vehicle margins, at best.
Furthermore, retail investors are notorious for overestimating the introduction and adoption of next-big-thing investments. While there's no doubt that EVs will play a big role in future transportation, NIO hasn't even demonstrated that it can truly scale yet.
Image source: Getty Images.
4. GameStop
Lastly, the Reddit stock that started the retail investor frenzy, GameStop (GME 7.58%), chimes in as the 10th most-held Robinhood stock. Like AMC, it was targeted by the WSB community for its exceptionally high short interest, relative to float. None of the Reddit rallies was more pronounced than GameStop's, which took its stock from $18 a share to nearly $500.
But like the other top-10 Robinhood holdings here, GameStop's nosebleed valuation simply doesn't match up with its underlying fundamentals or outlook. For example, even though e-commerce sales during the holiday season advanced 309% from the prior-year period, total sales still declined by 3.1%. This is a reflection of GameStop closing 11% of its stores from the prior-year period.
The clear issue for the company is that it's brick-and-mortar-based in an increasingly digital world. GameStop waited far too long to begin its shift to digital gaming, and closing stores to cut costs is its only real game plan at this point. More than likely, GameStop is staring down a fourth consecutive annual loss this year.
Though short-term investor emotions are impossible to predict, GameStop, NIO, Sundial, and AMC could all easily lose 50% (or more) of their value at some point in the not-so-distant future.
