Over the past year, retail investors have made their presence known on Wall Street. In particular, they've flocked to popular online investing app Robinhood. We know this, because Robinhood gained approximately 3 million new users in 2020, yet the average age of its user base is only 31.
While it's great to see young investors putting their money to work in a proven wealth creator (the stock market), the lack of experience for these millennial and/or novice investors is clearly visible on Robinhood's leaderboard, which details the 100 most-held stocks on the platform. Quite a few of Robinhood investors' most-held stocks are momentum plays or penny stocks that lack true substance -- and this isn't a fact that's lost on Wall Street.
According to the consensus one-year price targets of Wall Street analysts, three of the most popular Robinhood stocks offer projected downside ranging from 28% to as much as 77%. You could rightly say that these are the stocks Wall Street believes you should avoid.
American Airlines Group: Implied downside of 28%
The first of the extremely popular Robinhood stocks that Wall Street believes should be grounded is American Airlines Group (AAL 3.55%). The major airline closed on April 7 at $23.93 a share, but has a consensus price target over the coming 12 months of $17.33. That's an implied decline of 28%.
On the bright side, airline stocks are expected to benefit from pent-up vacation demand in the wake of an extraordinary coronavirus vaccination response effort in the United States. Through April 7, a quarter of the adult population in the U.S. was fully vaccinated, with more than 42% of the population having received at least one dose. The more people who choose to vaccinate, the quicker pandemic-related restrictions will be lifted.
However, American Airlines is a mess compared to most other major and regional airlines. Even with coronavirus relief loans and capital raises, the company has about $41 billion in debt and less than $7 billion in available cash. That more than $34 billion in net debt is the highest in the airline industry, and it's going to cripple the company's growth initiatives throughout the rest of the decade, assuming it's able to survive over the long run.
As my Foolish colleague and airline industry specialist Adam Levine-Weinberg pointed out in 2018, American Airlines also made the poor decision to modernize its fleet well before it was necessary to retire dozens of its 737s. This is another reason why American's debt is so much higher than its peers.
Even if travel returns to normal earlier than expected and the economy churns out above-average growth, American Airlines' margins will be mediocre, at best. With the company no longer able to repurchase its stock or pay shareholders a dividend as a result of taking coronavirus relief loans, Robinhood's 14th most-held stock certainly has the look of an investment to avoid.
AMC Entertainment: Implied downside of 56%
An even more popular Robinhood stock -- the platforms' fourth most-held -- with double the downside potential of American Airlines is movie theater chain AMC Entertainment (AMC -0.15%). Even with a lofty price target set recently by investment bank B. Riley Financial, shares of AMC are expected to decline from a closing price of $9.85 to just $4.29. That's a projected one-year fall of 56%, if the consensus proves accurate.
Similar to American Airlines, the bull thesis for AMC centers around the reopening of the U.S. economy. Last year saw periods of time where most of AMC's theaters were closed. The rapid vaccination rates we're seeing in the U.S. offer hope that movie theaters can return to full capacity sooner than later. AMC has also been exceptionally popular among Reddit's retail investors.
But there are plenty of reasons to be skeptical of AMC's turnaround.
For one, let's not forget that the company was mere days from bankruptcy in January, and was saved only by issuing nearly 165 million shares and offering over $400 million in debt capital. According to S&P Global Market Intelligence, the company has in the neighborhood of $11 billion in combined convertible and non-convertible debt, with some $6 billion in non-convertible debt due in 2026. This is a company that could struggle to service its existing debt, and may not be able to raise the capital need to repay $6 billion in debt in five years.
A lot will depend on a May 4 proxy vote where shareholders will approve or deny AMC's ability to issue up to 500 million new shares. With approval, the company likely survives, but shareholders will get buried by dilution. If voted down, I don't see how AMC has the funds to survive over the long term.
Tack on the fact that streaming companies are eating into AMC's film exclusivity, and you have plenty of reasons to heed Wall Street's warning.
GameStop: Implied downside of 77%
But the crème de la crème of implosions is expected to come from video game and accessories retailer GameStop (GME 0.92%). Currently the 13th most-held stock on Robinhood, GameStop is projected to decline from the $177.97 it closed at on April 7 to just $40.64 over the next 12 months. If accurate, shareholders would be looking at a loss of 77%.
Like AMC, the Reddit frenzy has a played a big role in its recent upside. GameStop was the most short-sold stock in mid-January, as a percentage of its float. This made it the perfect target of Reddit's retail investors, who chose to buy shares and out-of-the-money call options in GameStop to effect a massive short squeeze.
The bad news for GameStop (and AMC, too) is that the recipe needed for an extended short squeeze no longer exists. Considerably higher daily trading volume and a huge decline in short interest means that pessimists are unlikely to feel "trapped" in their positions, which is a necessity to induce a short squeeze. This places the focus on GameStop's operating results, which frankly haven't been that good.
Although e-commerce sales rose by 191% last year, total sales still declined by 21%. This included a 12% reduction in the company's store count. Even with digital gaming initiatives growing rapidly, GameStop waited far too long to make the shift away from its brick-and-mortar model. As a result, it's left with a core strategy that involves closing stores and cutting costs until it's back in the profit column. Last I checked, backpedaling to profitability isn't a long-term growth strategy.
There's a lot of retail euphoria behind GameStop at the moment, but operating results are what drive a company's share price over the long run.