For the past three months, Wall Street has been abuzz over retail investors.
Between the Reddit movement, which began in January and has focused on highly short-sold companies, and heightened volatility since the pandemic struck last year, retail investors have flocked to the stock market. We know this because online investing app Robinhood gained approximately 3 million new members in 2020. The average age of Robinhood's user base is only 31.
While it's great to see young people putting their money to work in the greatest wealth creator on the planet, it's also disappointing to see what they've been buying. According to Robinhood's leaderboard -- the 100 most-held stocks on the platform -- retail investors are predominantly buying momentum plays and penny stocks. In other words, dart throws.
What's particularly noteworthy is that three of the most popular stocks on Robinhood are companies that run a serious risk of delisting in the not-so-distant future due to their low share prices. It looks as if nothing short of a reverse split is going to save them.
On one hand, the outlook for the North American cannabis market is exciting. New Frontier Data expects the U.S. weed market to grow by 21% annually through 2025, ultimately hitting $41.5 billion in sales by mid-decade. Then there's pot-focused analytics company BDSA, which expects Canadian weed sales to more than double to over $6 billion by 2026. There's certainly opportunity for some North American pot stocks to thrive. However, Sundial doesn't look to be one of them.
Sundial's management team eliminated the debt on the company's balance sheet and built up a mountain of cash ($719 million Canadian). However, it's done so by diluting the daylights out of those shareholders who stuck by the company. Between Sept. 30 and Feb. 28, Sundial issued more than 1.15 billion shares of stock. To boot, the company recently authorized an at-the-market offering that could result in the issuance of up to $800 million in additional shares. Based on its April 6 closing price of $1.02, we're could be talking about another 784 million shares.
With an absurd 1.66 billion shares outstanding and approximately $0.34 per share in cash, Sundial is going to have a difficult time keep its head above the $1 minimum listing requirement for the Nasdaq exchange. It'll also be practically impossible for the company to ever generate meaningful earnings per share with 1.66 billion shares outstanding now, and possibly even more in the near future.
Wall Street looks negatively on reverse splits as a sign of company weakness, Sundial may have little choice but to enact one to avoid eventual delisting.
Another ultra-popular stock that could be delisted by the end of the second quarter if it doesn't enact a reverse split is dry bulk shipping company Castor Maritime (CTRM 0.93%).
Mind you, there's a bull case for Castor. A rebounding global economy should see dry bulk transports for goods like grains, steel, cement, sugar, and fertilizers increase. Castor doubled its fleet in 2020 from three vessels to six and more than doubled its fleet to 14 ships since the year began. It's a relatively younger shipping company that's attempting to ramp up its vessel ownership right as the global vaccination campaign kicks into high gear. And it certainly hasn't hurt that Castor, like Sundial, has been a big hit with Reddit-based retail investors.
Unfortunately, Castor's answer to raising the capital needed to expand its fleet has been to issue mountains of stock. Here's a truly jaw-dropping statistic: Between Dec. 31, 2019, and today, Castor Maritime's outstanding share count has risen from 3.27 million to 707.3 million -- that's not a typo. Worst of all, the company recently filed to sell another 192.3 million shares in a direct offering. Most of these registered direct offerings also come with warrants, which'll cap any significant upside in the company's share price and could balloon its outstanding share count well above 1 billion.
Even though it operates as a petroleum products shipper, I'd encourage investors to check out what's happened with TOP Ships. TOP Ships has followed the exact same blueprint of dilution and reverse splits to expand its fleet, and its long-term shareholders have effectively been wiped out. Shareholders in Castor Maritime may eventually share the same fate.
A third popular Robinhood stock that looks as if it'll eventually need a reverse split to right the ship is clinical-stage veterinary drug and diagnostics developer Zomedica (ZOM -0.29%). It's currently the 16th most-held stock on Robinhood.
Shares of Zomedica have been on fire over the previous six months. Through April 5, it was up a cool 1,259%. But the head-scratching thing is most of these gains are due to euphoria rather than anything tangible. For example, Zomedica rallied in January following a YouTube namedrop from Tiger King star Carole Baskin -- a mention she was paid to make. It was also a popular penny stock among the Reddit traders in February.
Since Zomedica is primarily focused on researching new therapeutics and diagnostics that can be used to treat companion animals, it took the opportunity to use its large run-up in share price to raise cash by selling stock. Since the year began, the company has issued more than 305 million shares.
Here's the problem: Zomedica now has 947.3 million shares outstanding. While it likely has enough cash to avoid any additional dilutive offerings for the next couple of years, it's going to be difficult to justify a valuation that keeps its share price above $1. Despite now generating revenue from the sale of its Truforma diagnostics system, Zomedica is valued at nearly 70 times Wall Street's projected sales for 2023. It's also nowhere near profitability.
It's a strong candidate to enact a reverse split sometime over the next 12 to 18 months.