For more than a year, we've watched an interesting phenomenon take shape on Wall Street. The more volatile things have been for equities, the more enticing it's been to young and novice investors. How do we know this, you ask? Just take a closer look at the success of online investing app Robinhood.
Robinhood, which is known for its commission-free trades and gifting of free shares of stock to new members, gained in the neighborhood of 3 million new users in 2020. The thing is, the average age of its user base is only 31. It's become an investing destination that young and/or novice retail investors have flocked to.
In one respect, it's fantastic to see young people putting their money to work in a proven wealth creator (the stock market). Conversely, it's terrifying to see what they've been buying. With many focused on the short term and looking to get rich quickly, Robinhood's leaderboard (the 100 most-held stocks on the platform) is packed with momentum plays, penny stocks, and other undesirable companies.
Among these most-held stocks are four extremely popular companies that I wouldn't buy, even with free money.
Let's begin with the fourth most-held stock on the entire platform, Canadian marijuana stock Sundial Growers (SNDL 0.69%). Sundial was caught up in the Reddit frenzy in late January and early February and also happens to be a penny stock, which creates double the attraction for young investors. Unfortunately, management appears hell-bent on diluting the daylights out of its shareholders, and the company's operating performance has, thus far, been poor.
In an effort to clean up its balance sheet, Sundial has undertaken numerous share offerings and debt-to-equity swaps, as well as had warrants executed. All told, in the five-month span between Oct. 1, 2020, and Feb. 28, 2021, Sundial Growers' outstanding share count more than tripled to 1.66 billion.
Worse yet, Sundial recently filed to sell up to $800 million worth of its stock via at-the-market offerings. Based on its closing price of $0.852 on April 15, this could add another 939 million shares to the outstanding count, if fully executed. This enormous share count will make it impossible for the company to generate meaningful earnings per share and could make it difficult to remain listed on the Nasdaq exchange without enacting a reverse split.
The last straw is that Sundial is still years away from becoming profitable or even hitting $100 million in sales. It has no business being valued at $1.42 billion.
American Airlines Group
I will never understand the fascination Robinhood investors have with airline stocks. It's an industry with exceptionally high capital inputs that, even under ideal conditions, generates mediocre margins. But there are even more reasons why the 13th most-held stock on the platform, American Airlines Group (AAL 2.67%), is unworthy of my money.
Although it's been a popular reopening trade, American Airlines' balance sheet is the train wreck of the airline industry. It's lugging around $41 billion in debt and has less than $6.9 billion in cash. It was forced to raise a lot of capital during the pandemic to ride out the uncertainty, and it made a poor decision to modernize its fleet in 2018, resulting in the company taking on debt long before it was necessary to do so.
Also, ramping the company's operations back up won't happen overnight. In a perfect scenario, coronavirus variants won't slow the push to herd immunity in the United States. Even then, it could still be another year or two before American Airlines is back to generating a profit.
And let's not forget that as part of accepting coronavirus relief capital, American Airlines will no longer be repurchasing its stock or paying a dividend. Without a capital return plan, the only reason to own airline stocks has flown the coop.
The former most-held Robinhood stock, Aurora Cannabis (ACB 2.71%), is yet another pot company I wouldn't invest in with free money. Though it was the most-held stock at this time last year, it's since fallen to the No. 18 spot on the leaderboard.
Many of the reasons I believe Sundial Growers is a terrible company are also applicable to Aurora Cannabis. In particular, Aurora's share-based dilution has been off the charts for years, and it's absolutely destroying shareholder value. In a roughly 6.5-year stretch, Aurora's outstanding share count has risen by more than 13,500% to 186.2 million shares. Keep in mind that this takes into account the 1-for-12 reverse split enacted by the company in May 2020. Otherwise, it would have over 2.2 billion shares outstanding today.
Aurora Cannabis's acquisition track record is also quite poor. It's responsible for what I believe is the worst acquisition in marijuana history: the 2018 all-stock purchase of MedReleaf for 2.64 billion Canadian dollars (about $2.11 billion). Aurora ultimately sold a key greenhouse that was never retrofit for cannabis production for what seemed like pennies on the dollar and shuttered another of MedReleaf's cultivation facilities. It's now left with 28,000 kilos of annual output and a handful of proprietary brands -- for CA$2.64 billion.
If you need one final reason why Aurora should be avoided, here it is: The company's management has moved the finish line for reaching positive earnings before interest, taxes, depreciation, and amortization (EBITDA) further down the road on numerous occasions.
Lastly, I wouldn't put free money to work in the third most-held stock on the platform, movie theater operator AMC Entertainment (AMC -3.28%).
AMC has been particularly popular among young investors following its short-squeeze event in late January. The problem is young investors seem so focused on short interest and the possibility of another short squeeze that they're ignoring blatant fundamental and balance sheet red flags.
For example, AMC and its shareholders look to be faced with a no-win scenario come May 4. The company wants the authority to issue up to 500 million shares, as needed, to raise capital. This capital will be vital to meeting the company's debt obligations in the years to come. If shareholders approve the issuance, AMC will almost certainly dilute its investors in the years to come. And if they vote no, it's unlikely the company will have enough operating cash flow to resolve its debt in future years. There is no positive outcome.
The pandemic has also taught us that the movie theater industry can be disrupted. In a handful of instances in 2021, new movies are debuting on streaming services the same day they're slated to hit theaters. This could weaken the film exclusivity AMC needs to draw people to its theaters.
To boot, AMC's short ratio (also known as days to cover) isn't high enough to trap short-sellers in their positions, which likely negates any possibility of a sustained short squeeze. AMC simply isn't worth your (or my) hard-earned money.