Over the past 14 months, investors have navigated their way through a historically high period of volatility for the stock market. While most investors shun volatility, wild vacillations in equities are precisely what have attracted young investors to the market.

If you're wondering how we know that millennial and/or novice investors are flocking to stocks, look no further than online investing app Robinhood. Last year, Robinhood gained an estimated 3 million new users. That's noteworthy given the average age of its user base is only 31.

A person examining a volatile stock chart on a smartphone, with digital charts on a monitor in the background.

Image source: Getty Images.

Robinhood investors are piling into these companies

In one respect, it's fantastic to see young people putting their money to work in the greatest wealth creator on the planet. According to data from Crestmont Research, there hasn't been a rolling 20-year period where the S&P 500, including dividends, has yielded a negative annual total return for investors between 1919 and 2020. In fact, only two end years out of the 102 years examined produced average annual total returns of 5% or less.

On the other hand, Robinhood investors aren't exactly "investing." The vast majority of the stocks young investors have been buying on Robinhood can be classified as momentum plays, penny stocks, or fundamental dart throws. In short, millennials and novice investors are looking to get rich quick, and that sort of strategy rarely ends well.

If you think I'm fibbing, here's a closer look at Robinhood's leaderboard for May, which details the 50 most-held stocks on the platform.

Company  Company 
1. Tesla Motors (TSLA 1.47%) 26. Netflix 
2. Apple 27. Coinbase 
3. AMC Entertainment 28. Alibaba
4. Sundial Growers (SNDL) 29. Castor Maritime (CTRM -3.32%)
5. NIO 30. Bank of America
6. Ford Motor  31. Canopy Growth 
7. General Electric  32. Moderna 
8. Walt Disney 33. Advanced Micro Devices
9. Microsoft  34. Facebook
10. Amazon  35. Ideanomics
11. Aphria 36. Starbucks
12. American Airlines Group 37. FuelCell Energy
13. Nokia  38. Tilray
14. Plug Power (PLUG -5.14%) 39. AT&T 
15. GameStop (GME 0.26%) 40. Twitter 
16. Zomedica (ZOM -3.20%) 41. Norwegian Cruise Line
17. Pfizer 42. General Motors
18. Aurora Cannabis  43. Coca-Cola
19. Carnival  44. BlackBerry 
20. Churchill Capital  45. Virgin Galactic
21. Palantir Technologies 46. United Airlines
22. GoPro  47. Zynga 
23. Delta Air Lines 48. Boeing
24. Snap 49. Workhorse Group
25. OrganiGram Holdings 50. Vanguard S&P 500 ETF

Data source: Robinhood, as of April 28, 2021. 

Reddit-fueled mania

If there's a prevailing influence on this list, it's the retail-oriented Reddit community. Beginning in January, retail investors on the WallStreetBets chatroom began allying with each other to buy common stock and call options in companies with very high levels of short interest. The goal for these folks was to effect a short squeeze. Between mid-January and early February, dozens of stocks experienced temporary moonshots higher. None has been the poster child more for Reddit-mania than video game and accessories retailer GameStop.

GameStop easily remains the top-performing stock, year-to-date, among companies with a market cap of at least $2 billion. Although its short interest, relative to float, has come down from the triple-digit percentage it stood at in mid-January, it's still high enough to draw the interest of young investors eager to generate another squeeze.

The issue with Reddit-mania is that young traders get so laser-focused on one or two metrics (ahem, short interest or short ratio) that they forget to analyze the company they're buying as a whole. Not only have the dynamics of a short squeeze changed for the worse over the past three months, but GameStop has been a fundamental disaster. In spite of 191% growth from e-commerce sales in 2020, total revenue still declined by 21%, with comparable sales off 9.5% and the company shuttering 12% of its stores.

Investments based on sentiment rarely turn out positive over the long run.

A man staring pensively at a single stack of pennies.

Image source: Getty Images.

Penny stocks galore

Robinhood investors also have an affinity for chasing after penny stocks -- i.e., companies with share prices below $5. The problem with penny stocks is that they're often "cheap" for a very good reason.

For instance, four of the 29 most-held stocks are penny stocks: Sundial Growers, Zomedica, OrganiGram, and Castor Maritime.

Marijuana stock Sundial is a particularly interesting case. Young investors love it because they strongly support the legalization of marijuana in the U.S., they realize that cannabis is a high-growth industry, and they know that Sundial was sitting on $719 million Canadian ($585 million) in cash in March 2021. This probably all sounds great.

But dig a bit deeper and you'll see a company that's more than tripled its outstanding share count in five months by issuing 1.15 billion shares. Were this not enough, Sundial's board also OK'd an $800 million at-the-market offering. In plain English, Sundial outstanding share count has ballooned from sub-100 million when it went public in 2019 to 1.66 billion by March 2021. With the ATM offering, it could head well above 2 billion.

Zomedica and Castor Maritime aren't much better. Zomedica has issued more than 305 million shares just since the year began, while Castor Maritime's outstanding share count has moonshot from 3.27 million at the end of 2019 to 899.6 million as of mid-April 2021.

All three of these companies – Sundial, Zomedica, and Castor Maritime – are losing money and may need to enact reverse splits just to avoid be booting from their respective U.S. exchanges.

A Tesla Model S plugged into an electrical outlet.

A Tesla Model S plugged in for charging. Image source: Tesla.

A big focus on alternative energy

Another big trend that stands out is Robinhood investors' love of all things alternative energy. The leaderboard is packed with electric-vehicle (EV) manufacturers (Tesla, NIO, Workhorse, Churchill Capital, GM, and Ford), fuel-cell solutions providers (Plug Power and FuelCell Energy), and ancillary players (Ideanomics). 

On one hand, this should be a no-brainer investment trend over the long run. There's little question that EVs and autonomous vehicles are the future of the automotive industry. According to the Society of Automotive Engineers of China, half of all auto sales by 2035 should be alternative energy, 95% of which are forecast to be EVs. China is the largest auto market in the world.

On the other hand, there's the real potential for a bubble to brew in the alternative-energy space. At no point over the past quarter of a century has the uptake of a next-big-thing technology been seamless and met the lofty expectations of momentum-chasing investors. That bodes poorly for EV manufacturers, ancillary players, and fuel-cell producers.

The valuations of certain EV-focused auto stocks are also a stretch. Imagine paying $667 billion for Tesla when the company still hasn't shown that it can generate a generally accepted accounting principles (GAAP) profit from selling EVs. Tesla's only means of producing profits has been to sell regulatory emission credits to other automakers, as well as book gains on digital assets (i.e., Bitcoin).

Likewise, Plug Power landed two major partnerships earlier this year, but it's yet to demonstrate its fuel-cell solutions at scale for the auto industry. That's sort of important for a company sporting a $17 billion market cap that isn't close to being profitable.

Suffice it to say, Robinhood investors love chasing after growth and volatility.