At the height of the pandemic, amid stay-at-home orders, retail investors flooded onto the zero-commission Robinhood stock trading platform. Since then, so-called Robinhood stocks have become something of a pejorative among experienced investors.
After all, the conventional wisdom is that retail investors tend to enter a market at the top. The dot-com bubble of the late 1990s, which burst in early 2000, is best perhaps the best example.
Of course, that’s not what happened in 2020. In this case, the retail investors were right. Robinhood’s trading activity picked up noticeably in March, when stocks plunged as institutions and hedge funds fled the market. Individual investors, by and large, bought at the bottom. Thousands made huge profits in names like Tesla (NASDAQ:TSLA) and Amazon (NASDAQ:AMZN).
As David Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, explained in an email to InvestorPlace, “Robinhood has introduced trading in stocks, ETFs, and options to a new generation of young investors in their 20’s and 30’s by providing these services without charging any commissions or fees. As a result of offering investors the opportunity to invest in fractional shares with as little as $1, the world of investing in equities has been democratized such that virtually everyone can participate.”
As markets have normalized, however, some widely owned Robinhood stocks, as compiled by the excellent website Robintrack.net, look questionable.
Multiple biotechs have soared on minimal news related to a novel coronavirus vaccine or treatment, only to collapse almost as quickly. Stocks near or even in bankruptcy, like Chesapeake Energy (NYSE:CHK) and J.C. Penney (OTCMKTS:JCPNQ) saw huge, unsustainable rallies.
So while Robinhood investors timed the market well, they also have owned, and still own, a few duds. Here are nine of those Robinhood stocks. All are in the top 100 stocks on the platform, per Robintrack data. And all probably shouldn’t be:
- Hertz (NYSE:HTZ)
- Aurora Cannabis (NYSE:ACB)
- GoPro (NASDAQ:GPRO)
- Genius Brands (NASDAQ:GNUS)
- United States Oil Fund (NYSEARCA:USO)
- iBio (NYSEMKT:IBIO)
- AMC Entertainment (NYSE:AMC)
- American Airlines (NASDAQ:AAL)
- General Electric (NYSE:GE)
Robinhood Stocks to Avoid: Hertz (HTZ)
Hertz helped give Robinhood stocks their reputation. As InvestorPlace Markets Analyst Thomas Yeung noted on this site, 11,000 Robinhood investors bought shares the day after the company declared bankruptcy in May. At one point, Hertz was in Chapter 11 and still had a market capitalization over $700 million.
The gains have faded since, but HTZ stock remains one of the biggest Robinhood stocks. According to Robintrack data, HTZ still is the 57th-most-owned stock on the Robinhood platform. It’s ahead of popular stocks like DraftKings (NASDAQ:DKNG) and General Motors (NYSE:GM), among many others.
And the stock still has a market capitalization of almost $200 million. HTZ in fact has rallied 166% following an 80% plunge when bankruptcy was declared.
After those gains, the current valuation simply doesn’t make much sense. The only way the common stock will have any value at all is if the value of Hertz’s assets clears its debt. That seems highly unlikely, barring a massive and sustained increase in used car values.
With the bankruptcy itself likely to cost hundreds of millions of dollars, and ongoing losses amid a collapse in demand, the math simply doesn’t work. It’s long since past time to move on from Hertz stock.
Aurora Cannabis (ACB)
Robinhood investors, perhaps unsurprisingly, are fond of cannabis stocks. Many of the most widely owned names come from the sector.
That optimism admittedly makes some sense. Cannabis stocks aren’t necessarily cheap, given many aren’t yet profitable. But they’re certainly cheaper than they have been.
Meanwhile, the industry retains some long-term potential. It’s abundantly clear at this point that Canadian operators, in particular, are dealing with oversupply. Even Canopy Growth (NYSE:CGC) CEO David Klein has admitted that there are “no logical buyers” for production facilities. But cannabis producers are responding, which should at some point lead to pricing stabilization and, hopefully, positive earnings and free cash flow.
So the issue isn’t necessarily the optimism toward the sector. It’s the top two choices: Aurora and Hexo (NYSE:HEXO). Both companies have significant balance sheet problems. In even a best-case scenario, both will be playing defense for years to come.
Meanwhile, the likes of Canopy and Cronos (NASDAQ:CRON) sit with substantial cash — and thus plenty of flexibility to respond to market challenges going forward.
It seems like Robinhood investors, to at least some degree, have focused on the low share prices of ACB (before its reverse split) and HEXO. That’s a mistake. Those shares prices are low for a reason. Even cannabis bulls should be looking elsewhere.
Robinhood Stocks to Avoid: GoPro (GPRO)
There are worse stocks on this list than GoPro, at least in my opinion.
GoPro is the leader in the action camera category. Valuation, at least based on revenue — and expected profits next year — is reasonable at worst.
That said, it is hard to see much of a reason to get excited about GPRO stock. The action camera category is stagnant. Profitability has been inconsistent. It’s possible GoPro at some point becomes an acquisition target, but bulls have been making that case for years now.
Robinhood investors see GPRO stock very differently, however. The stock is the 10th-most owned on the platform, with nearly half a million shareholders. It’s ahead of AMZN, Boeing (NYSE:BA) and many other companies with market values 100x higher.
That kind of optimism seems like too much. GPRO has been dead money for years now, and that may continue for quite a while.
Genius Brands (GNUS)
Starting on May 5, GNUS stock rose almost 25-fold in less than a month. Robinhood buying appears to have been a key catalyst. Ownership went from roughly 5,000 in early May to nearly 200,000 by mid-June.
The problem was that there wasn’t a lot of reason for the rally — or the buying. Bulls — aided by a fair amount of promotion by the company — saw Genius Brands as potentially a Netflix (NASDAQ:NFLX) alternative for kids.
But as InvestorPlace Markets Analyst Luke Lango argued this month, that case seems far too optimistic. And so it’s no surprise that GNUS has given back a good chunk of its gains.
The problem is that shares still are up over 400% from their early May levels. The company’s Kartoon Channel hardly seems like enough to support that kind of move, even with Genius Brands taking advantage of the rally to improve its balance sheet. It seems likely that at some point, even the remaining die-hard fans will exit, leaving GNUS back where it started.
Robinhood Stocks to Avoid: United States Oil Fund (USO)
The United States Oil Fund truly highlights the diverging perspectives surrounding Robinhood stocks. On one hand, the huge increase in ownership of USO seems questionable, to say the least.
USO is supposed to track crude spot prices. But the problem is that the fund has to use futures to do so. Over time, rolling over those futures has steadily eroded the value of the fund. As InvestorPlace’s Todd Shriber noted in late May, the fund through March 31 had posted an annualized loss of 18%.
And so the roughly 150,000 investors who own USO don’t seem to understand the entire story. In fact, many flooded into the fund in April, when USO had to execute a 1-for-8 reverse split after oil futures briefly went negative. Instead of learning from the fund’s troubles — and a noted change in its structure — Robinhood investors went in full-bore.
But those investors, whether they understand the fund or not, have been right. USO is up over 60% since the reverse split. Once again, the investors being scorned for their lack of knowledge are handily outperforming those who supposedly know better.
But, as I wrote about INO stock this month, on the whole, individual investors seem to be pricing in too much success into too many names. And we’ve seen some questionable biotech stocks post huge rallies on little news beyond a press release or two.
From here, iBio looks like one of those questionable biotechs. iBio took advantage of the Ebola pandemic to raise capital — and hopes — surrounding its pipeline. Nothing came of that optimism, and by last year the company had a market capitalization under $10 million.
It’s not guaranteed that history repeats itself. But with so many firms — among them the world’s greatest biotech and pharma companies — trying to develop a vaccine, it seems far too risky that iBio will be the winner this time.
Robinhood Stocks to Avoid: AMC Entertainment (AMC)
Movie theater operator AMC Entertainment seems like a perfect play on the return to normalcy. Shares are down 43% so far this year, but once a coronavirus vaccine or treatment arrives, demand should rebound in a hurry.
Robinhood investors certainly are buying the case. AMC is the 54th-most owned stock on the entire platform, despite a market capitalization under $500 million.
There’s one big problem with the case, however: AMC stock isn’t cheap. Yes, it’s down 43% so far this year. But considering losses this year, and debt raised to fund those losses, AMC including debt actually is nearly as expensive as it was at the start of the year.
Meanwhile, in part because of that debt, the stock looked like a value trap even before the coronavirus began to spread. With bankruptcy a very real risk, AMC seems like one of the Robinhood stocks that the platform has gotten wrong.
American Airlines (AAL)
AMC isn’t the only play on normalcy among Robinhood stocks. American Airlines is a major holding, with over 650,000 users. That’s the third-highest figure on the entire platform.
But as I detailed earlier this week, AAL stock isn’t the right play, even for airline bulls. Like AMC, American has a troubling amount of debt. In fact, it almost certainly has the worst balance sheet of the four major U.S. airlines.
Management is a concern as well, even in the context of an industry that badly erred in preparing for the next crisis.
There is a better option in terms of playing an airline rebound, which admittedly is one of the more-owned Robinhood stocks: Southwest Airlines (NYSE:LUV). A better balance sheet and better management seems to make LUV a better choice, even if Robinhood investors disagree.
Robinhood Stocks to Avoid: General Electric (GE)
As far as cheap stocks go, General Electric probably isn’t a terrible choice. New CEO Larry Culp is trying to right the ship. Asset sales have helped the balance sheet. GE at $30-plus a few years back was a clearly dangerous name, even at the time. Under $7, it’s not the worst gamble in the market.
Still, the risks here remain significant. And there are reasons why GE stock hasn’t been able to match the optimism that greeted Culp’s hire in October 2018. Boeing’s problems are a factor. The pandemic hasn’t helped, either.
The broader issue, however, remains the same: GE is not what it was. GE Healthcare is an excellent business, but Power is a mess, Aviation is struggling, and there’s not much left after a series of divestitures.
From a distance, GE stock looks worth the gamble. Looking closer, the case gets much more cloudy. Yet GE stock, somewhat incredibly, is the second-most owned of all Robinhood stocks. Only Ford (NYSE:F), another once-great company struggling to execute a turnaround, is more popular. In both cases, however, Robinhood investors seem to be looking backward, instead of forward.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.