For better or worse, volatility has played a big role in the stock market since the beginning of 2020. We've witnessed the quickest decline of at least 30% in the history of the S&P 500, and investors have enjoyed the strongest bounce-back rally from a bear market bottom on record.
Although not all investors are fans of a wildly vacillating market, this volatility is precisely what's encouraged millions of new retail investors to put their money to work on Wall Street.
We know that retail investors are getting involved in a big way, thanks to user data from newly public online-investing app Robinhood Markets (HOOD). After ending June 2020 with 9.8 million funded accounts, Robinhood had 22.5 million funded accounts as of the end of June 2021.
If you're wondering why retail investors have flocked to Robinhood, it looks like a confluence of factors. To begin with, Robinhood doesn't charge trading commissions for stocks purchased on the New York Stock Exchange (NYSE) or Nasdaq. With minimum deposit requirements also thrown out the window for many online brokerages, it means new investors aren't having their starter capital gobbled up by fees.
To build on the previous point, Robinhood also allows for fractional-share investing. Instead of investors needing to save up hundreds or thousands of dollars to buy a single share of a high-priced stock, Robinhood allows its members to purchase fractions of a share with as little as $1.
While it's great to see retail investors taking the bull by the horns and putting their money to work in the greatest wealth creator on the planet, their investing strategy can, at times, be questionable.
Here's a closer look at Robinhood's leaderboard as we prepare to enter October, which features the 50 most-held stocks on the platform:
|1. Apple (AAPL -0.03%)||26. GameStop|
|2. Tesla Motors (TSLA 1.38%)||27. Bank of America|
|3. AMC Entertainment (AMC -2.81%)||28. OrganiGram Holdings|
|4. Sundial Growers (SNDL -4.05%)||29. Nvidia|
|5. Ford Motor||30. Facebook|
|6. Nio (NIO 1.62%)||31. BlackBerry|
|7. Amazon||32. Coinbase Global|
|8. Microsoft||33. SPDR S&P 500 ETF|
|9. Walt Disney||34. Tilray|
|10. Pfizer (PFE 2.73%)||35. Vanguard S&P 500 ETF|
|11. American Airlines Group||36. Starbucks|
|12. Plug Power||37. Moderna|
|13. Robinhood Markets||38. Advanced Micro Devices|
|14. Carnival||39. Canopy Growth|
|15. Lucid Group||40. Virgin Galactic|
|16. Aurora Cannabis (ACB -3.80%)||41. AT&T|
|17. GoPro||42. Twitter|
|18. Nokia||43. Coca-Cola|
|19. Zomedica (ZOM 1.33%)||44. FuelCell Energy|
|20. Alibaba||45. Norwegian Cruise Line|
|21. Netflix||46. Zynga|
|22. Naked Brand Group||47. Uber Technologies|
|23. Delta Air Lines||48. Ideanomics|
|24. Snap||49. General Motors|
|25. Palantir Technologies||50. Workhorse Group|
Meme stocks are king
One thing that really stands out about retail buying habits on Robinhood is that they love their meme stocks. Meme stocks are companies lauded for their social-media popularity, rather than their operating performance. Examples of popular meme stocks from the above list include AMC Entertainment, Sundial Growers, Robinhood, Zomedica, Naked Brand, GameStop, and BlackBerry.
While many of these companies rocketed higher this year on the heels of the short-squeeze bonanza that occurred in late January and early February, they're also, in many cases, poorly run and losing money.
For instance, even though penny stock Zomedica introduced its first commercial companion-animal diagnostics product (Truforma) in March, the company managed less than $30,000 in sales through June 30. Zomedica is no closer to generating a profit than it was prior to the launch of Truforma. To boot, the company's outstanding share count has soared as the company turned to share sales to raise money.
It's a similar story with the No. 3 stock on the leaderboard, AMC Entertainment. AMC may have the full support of the retail community, but that hasn't stopped movie-ticket sales from declining for nearly two decades or halted AMC from burning through nearly $577 million in cash in the first six months of 2021. With over $1 billion (in aggregate) worth of AMC's bonds due in late 2026 and mid-2027, which are valued at well below par, bondholders are pricing in the very real possibility of a debt default.
Canadian cannabis stocks are a buzzkill
Robinhood's leaderboard also shows that retail investors love marijuana -- and I don't disagree with them. Cannabis could very well be one of the fastest growth trends of the decade.
The issue, though, is Robinhood's retail traders are forced to buy Canadian marijuana stocks. Since the platform doesn't allow its users to buy stocks listed on the over-the-counter (OTC) exchange, only NYSE- and Nasdaq-listed companies are fair game.
These two exchanges won't allow companies that directly deal with cannabis in the U.S. to list their shares. This means U.S. pot stocks are off-limits, whereas struggling Canadian weed companies, which don't operate in the U.S. but are listed on the major exchanges, are fair game.
As an example, Robinhood's investors once pushed Canadian-licensed producer Aurora Cannabis to the No. 1 spot on the platform. Though Aurora had, at one time, 15 facilities that could be used for production, it's since shuttered, sold, or halted construction on more than half of them. Aurora's management team used poor judgment when grossly overpaying for acquisitions to expand capacity, and the company has continued to sell its stock and dilute its shareholders to fund its operations.
The story is somewhat similar for penny stock Sundial Growers, the No. 4 most-held company on the platform. Sundial is swimming in cash (about $948 million), but this capital has been raised by drowning investors in new share issuances. In a nine-month stretch, Sundial's share count quadrupled from 509 million to north of 2 billion. This'll make it virtually impossible for Sundial to ever generate meaningful earnings per share.
Next-generation technology is electric
Robinhood's retail investors are generally younger, and this younger generation loves to put their money to work in next-generation technology and innovation. In particular, Robinhood's leaderboard is packed with companies that manufacture electric vehicles (EV) or support EV companies.
The EV thesis could be a no-brainer investment... if investors remain patient. Building a concept from the ground up takes a lot of capital and time. Mistakes will undoubtedly be made, and not every company will necessarily be a winner, even in the fast-growing EV space. But given the need to fight climate change, a worldwide vehicle-replacement cycle for consumers and businesses could go on for multiple decades and ignite growth in auto stocks that hasn't been seen in decades.
Perhaps it's no surprise that Tesla Motors has consistently been either the most-held or second most-held stock on the platform. Tesla CEO Elon Musk is a visionary and generally well-liked by young investors for his desire to use technology for the greater good. Tesla looks like it's on track for roughly 800,000 EV deliveries in 2021, and the company produced its largest operating profit to date in the second quarter.
China-based Nio has also been a regular fixture in the top 10. If not for a global semiconductor chip shortage, the company would likely be on its way to an annual run rate of 150,000 EVs. Nio has been introducing a new vehicle to its lineup each year, and last year rolled out a subscription-based battery-as-a-service program that should drive brand loyalty and lift long-term margins.
Familiar brands and services are popular
Lastly, Robinhood's retail investors have in some way embraced the Peter Lynch mantra to "buy what you know." The October leaderboard contains quite a few brand-name companies that investors regularly interact with.
As an example, innovation-kingpin Apple recently moved back to its No. 1 spot atop the leaderboard. Apple's iPhone is the unquestioned smartphone market-share leader in the United States. The company also has quite the loyal following anytime a new product is introduced. With Apple raking in $104.4 billion in operating cash flow over the trailing 12 months, it's hard to fault investors for riding its coattails.
Retail investors have also piled into pharmaceutical stock Pfizer, which is playing a big role during the pandemic. As you may already know, Pfizer and BioNTech have developed one of the two most-popular coronavirus vaccines. Given the mutability of the SARS-CoV-2 virus and the potential need for booster shots, Pfizer's one-time sales boost could turn into more of a recurring-revenue stream.
While the "buy what you know" strategy has its limitations -- e.g., just because retail investors go to the movies, it doesn't mean AMC is in any way a viable investment -- it's good to see younger investors digging into what makes businesses tick.