For more than a year, retail investors have been piling into the stock market. We know this because popular online investing app Robinhood picked up approximately 3 million new members last year. The average age of Robinhood users is only 31.
On one hand, it's always great to see people putting their money to work in the stock market when time is their greatest ally. The earlier people start investing, the more likely they are to achieve financial freedom.
On the other hand, many of Robinhood's retail investors lack a long-term mindset. Most are busy chasing momentum/buzzworthy companies, penny stocks, and businesses with highly questionable balance sheets and/or operating results.
Although the following five stocks are extremely popular with Robinhood investors, I'd suggest avoiding them like the plague in May.
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GameStop
To begin with, investors should remain far away from video game and accessories retailer GameStop (GME 3.77%), which has been at the heart of the Reddit-fueled focus on companies ripe for a short squeeze.
Back in January, no publicly traded company had higher short interest, relative to its float, than GameStop. This, along with a short ratio above 6, made it a logical target for retail investors via a short squeeze. However, GameStop's shares held short have declined significantly since January, all while average daily trading volume has soared. The dynamics that made an epic short squeeze possible four months ago no longer exist.
From an operating standpoint, GameStop was wise to use its share-price run-up to raise $551 million in gross proceeds via an at-the-market share offering. It's also seen rapid growth in its e-commerce operations.
Nevertheless, sales for the company tumbled 21% last year as comparable-store sales dipped 9.5%, and 12% of all GameStop locations were closed. GameStop has always been built on a brick-and-mortar model that, in the gaming world, is now obsolete. The company will be backpedaling for years to come in an effort to reduce costs and redirect capital to digital gaming. I'm not saying GameStop won't eventually be successful in this transition so much as pointing out that a $12.3 billion market cap doesn't accurately reflect the struggles that lie ahead.
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Coinbase
Since its initial public offering last month, popular cryptocurrency exchange Coinbase (COIN +1.19%) has rocketed up Robinhood's leaderboard. Given the strong support for digital currencies among young investors, this isn't a surprise.
The problem is that Coinbase looks to have an operating model that can be easily disrupted. For instance, we've seen firsthand what happened to commission fees among traditional brokerage firms. The constant undercutting of commission fees eventually caused brokerages to simply pivot away from these fees as a source of revenue. Coinbase could see its fee structure undercut by new or existing cryptocurrency exchanges.
Coinbase is also highly dependent on the hype and euphoria continuing for Bitcoin and Ethereum. These two coins make up the vast majority of trading revenue for the company. The last time Bitcoin shed 80% of its value -- something it's done three times over the past decade -- Coinbase's total sales declined by nearly 50% in two years. Put another way, Coinbase is entirely reliant on external factors, rather than innovation.
With the regulatory future of cryptocurrencies in the U.S. uncertain, Coinbase is valued far too aggressively.
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Sundial Growers
I'm not sure I'll ever understand why Canadian marijuana stock Sundial Growers (SNDL 2.88%) has consistently been a top-four holding on Robinhood for three months and counting. Young investors do have a thing for penny stocks, but there's often a very good reason why a company trades for mere pennies.
The biggest knock against Sundial is that its management team has shown virtually no regard for the welfare of shareholders. Wanting to clean up the company's balance sheet, management executed multiple share offerings and debt-to-equity swaps since the beginning of October to raise cash. It took just five months for 1.15 billion shares to be issued.
To boot, the company announced an at-the-market program in March that could raise another $800 million. To put this into some context, another $800 million, if fully executed, would balloon the outstanding share count by 926 million shares. At this point, Sundial's massive share count makes it unlikely to ever generate meaningful earnings. Worse yet, the company could eventually be delisted from the Nasdaq, unless it enacts a reverse split.
Unlike most North American pot stocks, Sundial isn't near profitability, either. Its late switch from wholesale to retail cannabis should doom it to another year of operating losses in 2021.
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Zomedica
A fourth Robinhood stock that'd be best left on the shelf in May is veterinary-focused drug and diagnostics developer Zomedica (ZOM 3.07%). Like GameStop and Sundial, Zomedica has been a favorite of the Reddit community for both its high short interest and penny stock share price.
March represented a watershed moment for Zomedica as the company moved beyond its entirely clinical-stage status and sold its first Truforma point-of-care diagnostics system for cats and dogs. With pet ownership in the U.S. rising for decades, and owners treating their four-legged friends as family, pet stocks are typically solid long-term performers.
However, all Zomedica has going for it, at the moment, is Truforma. Based on consensus estimates, it's going to be another three years before companywide sales even top $20 million. As for Zomedica, it ended the previous week with a market cap of $1.03 billion. That's roughly 50 times sales ... for 2023!
The bigger concern is that Zomedica followed in the footsteps of other short-squeeze companies and sold a lot of stock to raise capital. While it's no longer cash-strapped, investors have been forced to digest well over 300 million new shares issued just this year. At the rate Zomedica has been diluting its investor base, it could soon hit 1 billion shares outstanding. Like Sundial, Zomedica will have an impossible task of generating meaningful earnings per share with so many shares outstanding.
Image source: Getty Images.
AMC Entertainment
Lastly, no list of Robinhood stocks to avoid would be complete without the most dangerous company of them all, movie theater chain AMC Entertainment (AMC +0.00%).
AMC has been a consistent top-three holding on Robinhood for three months and even managed to dethrone Apple as the platform's top holding for a couple of days in February. Robinhood and Reddit retail investors strongly believe a bigger short squeeze is brewing, and they see AMC as the ultimate rebound play in a reopening economy.
But there's another side to this coin that retail investors love to ignore. For one, AMC's short interest and short ratio lack the right recipe for a sustainable squeeze. A very short-term squeeze is always possible for companies with double-digit percentage short interest, but this shouldn't be the only basis for investment.
Robinhood investors also appear to be ignoring the company's restrictive balance sheet and ballooning outstanding share count. The shares AMC issued to stay afloat during the pandemic have pushed its market cap higher than at any point before the pandemic. Its share price may be a lot lower, but the company is pricier than it's ever been.
With AMC still years away from returning to pre-pandemic revenue levels, and the company not exactly raking in the dough before the coronavirus, it's difficult to see how it'll be able to service or pay down its debt without drowning its shareholders in dilution at some point in the future.
