For a majority of investors, volatility isn't something they look forward to. Then again, millennials aren't like a majority of investors.
In the wake of historic volatility over the past year and change, we've watched young and/or novice investors flock to the market like never before. If you need proof, just take a gander at what's happening over at Robinhood.
Robinhood investors can't get enough of these 50 stocks
Online investing app Robinhood, which is well-known for its commission-free trades, fractional-share investing, and gifting of free stock to new users, gained approximately 3 million new users last year. The interesting thing is that the average age of Robinhood's user base is only 31.
On one hand, seeing young people put their money to work in the world's greatest wealth creator is a happy sight. Since 1980, the average annual total return (i.e., including dividends) of the S&P 500 is over 10%. This is to say that the typical investor in an S&P 500 index fund is doubling their money with dividend reinvestment every seven years.
But the other side of this coin is that young Robinhood investors are rarely thinking about the long term. The most-held stocks on the platform (known as Robinhood's leaderboard) tend to be a combination of penny stocks, momentum plays, and whatever companies happen to be making news within a given week or month.
If you don't believe me, take a look at the top 50 stocks on Robinhood's leaderboard as we enter April.
|1. Apple||26. Snap|
|2. Tesla Motors (TSLA 7.33%)||27. Alibaba|
|3. AMC Entertainment (AMC 17.99%)||28. Castor Maritime|
|4. Sundial Growers (SNDL -1.99%)||29. Netflix|
|5. NIO (NIO 3.37%)||30. Bank of America|
|6. General Electric||31. Moderna|
|7. Ford Motor||32. Canopy Growth (CGC -12.07%)|
|8. Walt Disney||33. Ideanomics|
|9. Microsoft||34. FuelCell Energy|
|10. Amazon||35. Advanced Micro Devices|
|11. Nokia||36. BlackBerry|
|12. Aphria||37. Facebook|
|13. GameStop (GME 6.81%)||38. Twitter|
|14. Zomedica (ZOM -0.25%)||39. Tilray|
|15. American Airlines Group||40. Norwegian Cruise Line|
|16. Plug Power||41. AT&T|
|17. Churchill Capital||42. Virgin Galactic|
|18. Pfizer||43. Starbucks|
|19. Aurora Cannabis||44. Zynga|
|20. Carnival||45. Workhorse Group|
|21. Palantir Technologies||46. General Motors|
|22. GoPro||47. United Airlines|
|23. Delta Air Lines||48. Boeing|
|24. Naked Brand Group||49. Coca-Cola|
|25. OrganiGram Holdings||50. Roblox|
Retail investors' meme game is strong
If there's one thing that stands out from this list, it's that young Robinhood investors have faith in some highly questionable "meme stocks."
Without getting too far into the weeds, the meme stocks gained fame on community chat service Reddit. For the better part of 2 1/2 months, retail investors have been working together to buy shares and out-of-the-money call options in heavily short-sold stocks, with the sole purpose of effecting a short squeeze.
Since institutional investors and hedge funds hold the vast majority of shares held short, this meme movement has been pitched as a battle between retail investors and the "big money." Examples of highly popular meme stocks include AMC Entertainment, Sundial Growers, GameStop, and Zomedica.
The concern is that most meme stocks have wildly detached from their underlying fundamentals. Even though euphoria and emotion drive share-price movements in the short term, operating results determine where a stock heads over the long run. In the case of the aforementioned meme stocks:
- AMC Entertainment is being crippled by debt and the ongoing pandemic. It's unclear if the company can service its debt or cover projected losses over the next two years.
- Sundial Growers has drowned its investors by issuing 1.15 billion new shares since Sept. 30. It's one of the slowest-growing marijuana stocks, and could also be one of the last pot stocks to turn profitable on a recurring basis.
- GameStop waited far too long to shift away from a brick-and-mortar retail model to focus on digital gaming. Now it's scurrying to close stores, just to cut its expenses.
- Zomedica just launched its first diagnostics system for cats and dogs but is valued at close to 80 times Wall Street's projected sales for 2023.
Retail investors are playing a dangerous game that isn't going to end well.
Robinhood hoses its investors on cannabis
Another thing you'll note about the 50 most-held Robinhood stocks is that the platform has completely hamstrung its users when it comes to investing in marijuana. Cannabis is projected to be one of the fastest-growing industries of the decade. New Frontier Data believes annualized growth in the U.S., the most lucrative pot market in the world, will average 21% through 2025.
Yet Robinhood investors are virtually locked out of U.S. pot stocks. Since U.S. marijuana stocks can't list on the major U.S. exchanges, and Robinhood won't allow its users to buy over-the-counter-listed stocks, they're instead funneled into underperforming Canadian pot stocks like Sundial and Canopy Growth.
Canopy Growth does have a boatload of cash, thanks to a number of equity investments from spirits-giant Constellation Brands, but it's done a poor job of putting that capital to work. It's overpaid for acquisitions, and the company's free-wheeling spending generated huge losses for years. Without U.S. legalization, Canopy's valuation remains a red flag.
If there's any good news here, it's that Robinhood users at least now have a way to buy U.S. pot stocks, even if they can't get the unique exposure they might want. The AdvisorShares Pure U.S. Cannabis ETF (MSOS -1.22%) is an exchange-traded fund specifically focused on a variety of cannabis stocks in the United States. Since it's listed on a major exchange (hint, hint!), Robinhood users can buy it.
Pedal to the metal
A final trend you'll note from the 50 most-held stocks in April is that Robinhood investors really, really love companies that are developing or producing electric vehicles (EV) or alternative-energy transportation. EV stocks like Tesla, NIO, and Workhorse Group are garnering a lot of attention, with traditional auto stocks Ford and General Motors also widely owned. You'll also note hydrogen fuel-cell solutions provider Plug Power and FuelCell Energy are on the list.
It's pretty much a given at this point that the future of the automotive industry is anything that doesn't run on fossil fuels. According to the Society of Automotive Engineers of China, by 2035, half of all new-vehicle sales in the world's largest auto market (China) are expected to be alternative energy (95% of which will be EVs). Investors are simply placing their bets early on what should be a runaway growth trend for multiple decades.
The problem is that investors have historically overestimated the uptake on next-big-thing technologies. Dating back a little more than a quarter of a century, we saw bubbles burst with the internet, business-to-business commerce, genomics, blockchain, 3D printing, marijuana, and so on.
Electric vehicles and hydrogen fuel cell stocks will probably suffer the same fate. This isn't to say there won't be winners, so much as to point out that expectations don't come close to matching reality.
Tesla, for example, wouldn't even be profitable without selling regulatory emission credits to other automakers. That's an unnerving realization for one of the largest publicly traded companies. Then there's NIO, which has produced 88,444 EVs since its inception through February 2021 but is carrying around a $56 billion market cap.
Tesla and NIO can be successful, but these current valuations don't accurately reflect the challenges they'll face in the years that lie ahead.