It's possible that when the curtain closes on 2021, it'll be remembered as the year of the retail investor.
Since March 2020, we've seen a big uptick in the number of millennials who've put their money to work in the stock market. Online investing app Robinhood, which is known for its commission-free trading platform and gifting of free shares of stock to new users, attracted 3 million new members last year. That's noteworthy given the average age of Robinhood's user base is only 31.
On one hand, it's great to see young investors who have time as their ally putting money to work in the world's greatest wealth creator. On the other hand, quite a few of these young investors aren't thinking long term. Rather, they're caught up in the recent retail investor-fueled Reddit frenzy and looking to get rich quick.
The problem with the get-rich-quick strategy is that it rarely works -- and Wall Street knows it.
At the moment, there are four widely held stocks on Robinhood that, according to Wall Street's one-year consensus price targets, are expected to lose at least half their value, if not more. If these analyst estimates prove accurate, these dangerous Robinhood stocks could cost unsuspecting retail investors a boatload of money.
GameStop: Implied downside of 93%
Perhaps it's no surprise that the riskiest Robinhood stock of all is the company that started the Reddit frenzy, GameStop (GME -4.95%). Shares of the video game and accessories company are up nearly 4,700% over the past year, but offer 93% downside, if Wall Street's consensus is correct.
What made GameStop such a popular company to own among retail investors was its high short interest. Entering January, no public company had a higher percentage of shares held short, relative to its float. Because of this short interest, a flood of buyers were able to execute an epic short squeeze.
Unfortunately, most of the Reddit rally stocks have poor underlying fundamentals and/or a dubious long-term outlook. When it comes to GameStop, its biggest issue was waiting too long to focus on digital gaming. Even with its renewed focus on e-commerce, total sales for the company declined, once again, during the most recent holiday season. Further, GameStop is almost certainly staring down its fourth consecutive annual loss in 2021.
If there is some good news here, it's that GameStop isn't a lost cause. Eventually, it'll close enough stores to reduce its expenses to the point where it's profitable again. But there's a big difference between growth with a profit and backpedaling into a profit. GameStop is doing the latter, which is what has Wall Street rightly concerned.
AMC Entertainment: Implied downside of 75%
Movie theater chain AMC Entertainment (AMC 1.61%), which has risen in lockstep with GameStop for much of the past two months, is also on Wall Street's naughty list. Putting aside the $0.01 price target recently issued by one analyst, the Wall Street consensus is that AMC will lose three-quarters of its value over the next year.
AMC's outperformance over the past two months has to do with Reddit traders piling into the company, as well as folks betting on the reopening trade. AMC recently announced that 99% of its theaters would be open by March 26.
However, this optimism looks highly flawed. Many of the company's theaters are still facing capacity restrictions, and there are no guarantees that the coronavirus pandemic will officially end in 2021. New variants of the disease, along with vaccine holdouts, threaten to push herd immunity and a return to normal further down the road.
The company's solvency is also a potential concern. Even with more than $1 billion in cash on hand, Wall Street is expecting AMC to lose more than $1.7 billion, total, over the next two years. This implies the need to issue more dilutive stock or more debt.
As the icing on the cake, AMC is also losing some of its new release exclusivity to streaming service providers. At long last, the movie theater industry is being disrupted -- but that's not a good thing for AMC.
Riot Blockchain: Implied downside of 54%
Wall Street also views cryptocurrency mining stock Riot Blockchain (RIOT 6.38%) as a dangerous investment. The 76th most-held stock on Robinhood is projected to lose 54% of its value over the next year, according to analysts on Wall Street.
Riot Blockchain's incredible outperformance in recent months can be tied to the rally in Bitcoin (BTC -0.60%), the world's largest digital currency. As a cryptocurrency miner, Riot uses high-powered computers to validate groups of transactions (known as blocks) on Bitcoin's network. For validating blocks, Riot is given a block reward totaling 6.25 Bitcoin (worth about $365,000). In short, the higher Bitcoin goes, the more these block rewards are worth.
While this sounds like a pretty straightforward investment, it's not that simple. For example, the asset Riot is "mining" has had three separate instances over the past decade where it's lost at least 80% of its value. It's not clear if mining companies could survive such a protracted downtrend in Bitcoin.
It's equally concerning that Riot Blockchain's future is entirely tethered to the performance of Bitcoin. This is an operating model that's pretty much devoid of innovation and is constantly facing a growing number of competitors. Add on the halving of Bitcoin's block rewards every couple of years, and I believe there's more than enough incentive to stay far away from Riot Blockchain.
Sundial Growers: Implied downside of 54%
Similar to GameStop and AMC, Sundial and its high short interest have benefited from the Reddit frenzy. Investors also appear to be betting on the U.S. legalizing cannabis at the federal level. Doing so would allow Canadian marijuana stocks like Sundial to enter the far more lucrative U.S. weed market.
But if there's something tenured investors are very familiar with, it's the idea that all next-big-thing investments have losers. Even though marijuana is expected to be one of the fastest-growing industries this decade, Sundial hasn't demonstrated anything from an operational perspective to suggest that it'd be a winner.
One thing Sundial has done successfully is drown its existing investors in a sea of new shares. In a roughly five-month span, the company issued more than 1.15 billion shares via at-the-market offerings, registered direct offerings, and debt-to-equity swaps. Retail investors are quick to point to Sundial's mountain of new cash raised as a positive, but fail to see how the company's massive share count will cripple its potential for a long time to come.
With it looking less likely that the U.S. federal government will change its tune on cannabis at the federal level, and Sundial delivering ongoing losses and mediocre sales growth, it qualifies as the No. 1 pot stock worth avoiding.