There's little question that one of the standout themes of 2021 was the rise of the retail investor. Even though John and Jane Q. Public have been putting their money to work on Wall Street for more than a century, they rocked the boat more this year than ever before.
This retail crowd has been especially drawn to online investing app Robinhood (HOOD 0.17%), which offers commission-free trades, fractional share investing, and parses out free shares of stock to new members trading on the platform.
Among the 100 most-held stocks on the platform are three Robinhood stocks that completely blew the doors off Wall Street's expectations for the year. If retail investors put $200,000 to work in these popular Robinhood plays to begin the year, or when they first began trading in 2021, they'd be sitting on $1 million or more as of today.
AMC Entertainment: $2,690,000 (up 1,245%)
The top-performing large-cap stock in 2021, as well as the biggest gainer on Robinhood's leaderboard, is movie theater chain AMC Entertainment (AMC 11.93%). The third-most-held stock on Robinhood has skyrocketed 1,245% year-to-date, through the holiday weekend. This means an initial $200,000 investment would be worth close to $2.7 million.
The bulk of AMC's gains came on the back of a short squeeze in late January and early February. Short-sellers (investors wanting the price of a security to decline) were betting on AMC not being able to raise enough cash to keep the lights on. However, the company was able to save itself by selling around 164 million shares and issuing high-interest debt in late December 2020 and early January 2021. This capital raise caught short-sellers off-guard, which briefly sent AMC's shares to the moon.
Retail investors are also enamored with the idea that AMC will rebound from its pandemic woes as vaccination rates tick higher. The recent release of Spider-Man: No Way Home has especially roused the retail crowd. The movie is on track to be the first to generate more than $1 billion in global box office sales since the pandemic began.
But despite these gains, I'm firm in my view that AMC is the absolute worst stock you can buy right now. Inflation-adjusted domestic box office sales declined by 22% between 2002 and 2019, so things weren't exactly gong well for AMC before the pandemic hit. Now, the company's theatrical exclusivity period has been cut to 45 days (or less) when 75-to-90-day exclusivity used to be the norm. Streaming continues to slowly chip away at AMC's core business.
What's more, a quick look at the company's balance sheet should quickly close the curtain on the hype that's surrounded this meme stock. AMC is lugging around $5.45 billion in debt at an extrapolated average interest rate of 8%. Mind you, lending rates are at historic lows, and AMC is effectively paying borderline default interest rates. To boot, over $1 billion in aggregate debt due in 2026/2027 is valued at 30% or more below face value. That's added evidence bondholders believe AMC may eventually declare bankruptcy.
There's no question that AMC is the stock to avoid in 2022.
GameStop: $1,616,000 (up 708%)
Another Robinhood stock that turned $200,000 into well over $1 million in 2021 is gaming and accessories company GameStop (GME 0.54%). Currently the 30th most-held stock on Robinhood, GameStop galloped higher by more than 700% in 2021. This means a $200,000 investment turned into more than $1.6 million.
GameStop and AMC are effectively tied at the hip when it comes to short squeeze mania. GameStop was actually the company that kick-started retail investors' fascination with high short-interest stocks in mid-January. Since the short interest at GameStop was higher than any publicly traded company at the time, it was the target of a very quick but effective short squeeze.
Investors who continue to hold GameStop are primarily expecting another short squeeze to take place now that shares have pulled back close to 70% from their all-time high. They're also likely counting on GameStop to boost sales given its investments in digital gaming and other accessories.
While I'm nowhere near as bearish on GameStop as I am on AMC, there's simply no justifying an $11.6 billion market cap for a company that's years away from righting the ship.
On the bright side, GameStop is sitting on a healthy net cash position (i.e., it's not a bankruptcy concern like AMC), and it's operating in a growing digital gaming industry. However, the company's lifeblood has always been its brick-and-mortar stores, which are now somewhat of a drag on its sales and bottom line. GameStop is probably going to be shuttering stores for years to reduce its expenses and back its way into the profit column, once again.
Furthermore, GameStop's turnaround strategy has left a lot to be desired. Wall Street and investors haven't been given the finer details of how the company will gobble up share in the digital gaming arena.
Again, the company's net cash position should provide a much higher floor for its share price than it was pre-pandemic. But with consistent sales growth or profitability unlikely for years, there's ample downside potential with GameStop.
Digital World Acquisition Corp.: $1,068,000 (up 434%)
The third Robinhood stock that rocketed higher in 2021 is special purpose acquisition company (SPAC) Digital World Acquisition (DWAC -1.54%). Since its late September debut, Digital World Acquisition's shares are higher by 434%. This means a $200,000 investment on day one would be worth close to $1.07 million less than three months later.
While most SPACs have been clobbered in the second half of 2021, Digital World Acquisition soared after announcing a merger agreement on Oct. 20 with Trump Media and Technology Group (TMTG), the social media platform headed by former President Donald Trump. TMTG's platform, known as Truth Social, will feature a subscription-based video streaming service, as well as access to news, podcasts, and documentaries, among other content. The rollout of this content platform is expected in the first quarter of the coming year.
Earlier this month, Digital World Acquisition announced that it had secured commitments for $1 billion in capital once the merger between it and TMTG is complete. This funding will be combined with the roughly $293 million Digital World raised with its SPAC debut. All told, after expenses, TMTG should have around $1.25 billion in capital to fund its operations.
On one hand, there's no denying that former President Trump has a loyal following that's likely to jump at the chance to be part of the content offering from Truth Social. If these folks become subscribers and/or TMTG can effectively monetize these users, this media venture might prove successful.
On the other hand, the media space is highly competitive, and TMTG is still in the development stage of its content offerings. It's a near certainty the company will lose money during its ramp up, which makes its existing valuation hard to trust. For the time being, it's a stock to watch with interest, but not own.