Although retail investors have been investing side-by-side with Wall Street investment banks for more than a century, they've truly asserted themselves as a force to be reckoned with this year.
When retail investors collectively pile into (or out of) a stock, it tends to move. And if there's one thing retail investors love, it's a high-volume penny stock. A penny stock is very loosely defined as a company whose shares trade below $5. While not all companies with a share price below $5 meet the official parameters of a “penny stock,” according to the major U.S. stock exchanges, I’ll be referring to low-priced stocks as “penny stocks” throughout this article for the sake of simplicity.
What you should know is that penny stocks usually trade at a low share price for a good reason, be it poor operating performance, a subpar management team, or perhaps both. Nevertheless, this hasn't stopped retail investors from piling into companies with puny share prices. According to data from online investing app Robinhood (HOOD -0.74%), these are the four most widely held "penny stocks."
The unquestioned favorite penny stock of the retail crowd is Canadian marijuana stock Sundial Growers (SNDL 3.83%). Sundial has consistently been the fourth most-held stock on Robinhood's leaderboard for the past six-plus months.
Why Sundial? Retail investors are probably enamored with the growth potential of cannabis in North America. If the U.S. federal government were to legalize pot at the federal level, Canadian licensed producers like Sundial would have an opportunity to make a mark in the far more lucrative U.S. market.
Sundial is also sitting on a monstrous amount of cash, marketable securities, and long-term investments. As of Aug. 9, the company had approximately $1.2 billion Canadian (about $946 million U.S.). This is one of the largest war chests in the cannabis industry.
However, Sundial is a mess in many respects. Its management team has been drowning its long-term investors with a constant barrage of direct share offerings and at-the-market share sales. In a nine-month stretch, Sundial's outstanding share count skyrocketed from 509 million to north of 2 billion. With so many shares outstanding, it's going to be virtually impossible for this company to ever deliver meaningful earnings per share, or perhaps even keep its share price above $1 to avoid delisting from the Nasdaq exchange.
What's more, Sundial's shift from wholesale cannabis to retail has been bumpy. As Canadian weed sales continue to move higher, Sundial is contending with sizable year-over-year sales declines.
To add, the company's management team doesn't have a concrete plan for the capital it continues to raise. With no defined strategy, there's a good chance investors will see their ownership in Sundial diluted over time. Long story short, there's a good reason I called Sundial Growers the worst cannabis stock money can buy back in March.
Retail investors also love veterinary medicine and diagnostics company Zomedica (ZOM 1.37%), whose shares could be purchased for less than $0.60, as of this past weekend. It's currently the 18th most-held stock on Robinhood.
The love for Zomedica appears to originate from the company's huge run higher, along with a number of other meme stocks, in early February. Zomedica was, at the time, a fairly heavily short-sold company. When retail investors piled into companies being targeted by short-sellers, its share price went briefly parabolic.
The other factor to consider is that Zomedica is no longer a clinical-stage company. In mid-March, the company launched its point-of-care diagnostics system for cats and dogs, known as Truforma.
Unfortunately, Zomedica's Truforma launch has been abysmal. In the first 3.5 months on the market, less than $30,000 in revenue was raised from Truforma. Zomedica blamed the unexpected sale of its distribution partner and the lack of key assays from its development partner for the exceptionally slow rollout of its first commercial diagnostic product. Though it does have a new sales plan in place going forward, investors should rightly be skeptical of the company following its botched launch.
Making matters worse, Zomedica's management team has also been drowning its investors in common stock issuances. The company's $276 million in cash and cash equivalents means bankruptcy isn't a concern. But after issuing hundreds of millions of shares to help raise this capital, Zomedica is quickly approaching 1 billion shares outstanding. As with Sundial, having so many shares outstanding is going to make it almost impossible for the company to produce meaningful earnings per share.
Naked Brand Group
Another penny stock that retail investors can't stop buying is intimate apparel and swimwear company Naked Brand Group (NAKD). Naked Brand is the 22nd most-held stock on Robinhood, which actually makes it more popular than companies like Palantir Technologies, GameStop, and Facebook.
Similar to Zomedica, Naked Brand Group soared during the meme stock bonanza of early February. The company's relatively high short interest and very low share price made it the ideal target.
Retail investors are potentially also encouraged by the actions management is taking to grow the business. In January, the company announced plans to become an e-commerce-based business, which resulted in the divestiture of its brick-and-mortar assets at the end of April.
With no debt and plenty of cash, Naked Brand recently announced that it had reached a preliminary agreement on an acquisition "in a sector which has been forecast to have strong growth for many decades to come." Though the company cautions the agreement is still in the early stages as due diligence is conducted, Naked Brand looks to be taking a path toward higher growth potential and lower overhead costs.
Despite these positive developments, it's still worth pointing out that Naked Brand Group has lost money in each of the past six years, and it's working on what could be a third consecutive year of weaker sales.
Furthermore, and at the risk of sounding like a broken record, Naked Brand is a serial share diluter. While its cash position is solid now, its outstanding share count has grown from 96 million in October 2020 to 906 million today, according to data from YCharts. Having so many shares outstanding effectively relegates companies like Naked Brand, Zomedica, and Sundial to trade at pennies on the dollar.
Sundial isn't the only cannabis stock retail investors can't stop buying. They also fancy Canadian pot stock OrganiGram Holdings (OGI -1.96%), which is No. 28 on Robinhood's leaderboard. To put this into some context, four of the 28 most-held stocks by retail investors are penny stocks.
As with Sundial, investors are excited about the possibility of the U.S. legalizing marijuana at the federal level, as well as Canada's rapidly rising legal weed sales. In less than three years, monthly cannabis revenue in our neighbor to north has surged from around CA$50 million to north of CA$310 million in May 2021. Even though it's a much smaller market than the U.S., the Canadian weed market is expected to bring in $6.4 billion (that's U.S.) in annual sales by 2026, according to cannabis-focused analytics company BDSA.
The problem for OrganiGram is twofold. First, Canadian regulators have done a poor job of helping out the pot industry. They've delayed the issuance of cultivation and sales licenses, and in Ontario, Canada's most populous province, retail dispensary license approval was painfully slow through 2019.
Second, Canadian cannabis buyers have been gravitating to value-based products. This means margins associated with dried cannabis flower have been lower than expected, and supply chain issues with higher-margin derivatives have capped their near-term potential. As a result, OrganiGram has been losing money, even as Canadian weed sales hit new monthly highs.
While I strongly prefer U.S. multistate operators over Canadian licensed producers, OrganiGram is the one Canadian pot stock that I believe can be a long-term success story. Concentrating its growing, processing, and derivatives in a single facility should help control costs and drive margin expansion over the long run. But in order for OrganiGram's shareholders to be winners, they're going to have to be patient.