Trading platform Robinhood is the hot topic in investing of late. Most people are familiar with the underlying premise of the fiasco. Robinhood has been accused of favoring Wall Street over Main Street. The company has lost massive levels of trust, and it does bring into question the underlying machinations of money and markets.
Was Melvin Capital bailed out and protected by Citadel and Robinhood? We may never know for sure, but I think in this case it pays to remain acutely aware of the possibility.
Robinhood maintains that the issue was with its own capital levels as they relate to paying its clearinghouse. InvestorPlace’s Sarah Smith outlined the clearinghouse issue.
Who you believe is ultimately up to you. I’ll give Robinhood some credence for the fact that capital reserves as they relate to its clearinghouse seem to be a very legitimate restriction. At the same time, this whole thing smacks of Melvin Capital being able to skirt the rules it agreed to abide by.
The wake of the ordeal is Robinhood restrictions. I’m going to assume that further trading restrictions will be the result of clearinghouse capital requirement issues. These should occur if a given stock rises at unanticipated rates pushing Robinhood over its clearinghouse capital requirements.
My theory is that the lower-priced, popular stocks on Robinhood are at the greatest risk. These have the greatest ability to appreciate quickly triggering restrictions, including these:
- Zomedica (NYSEAMERICAN:ZOM)
- TherapeuticsMD (NASDAQ:TXMD)
- Sundial Growers (NASDAQ:SNDL)
- Ocugen (NASDAQ:OCGN)
- BlackBerry (NYSE:BB)
- Zynga (NASDAQ:ZNGA)
- Dillard’s (NYSE:DDS)
Robinhood Risk Stocks: Zomedica (ZOM)
Zomedica is a stock that has risen very quickly, but also remains very cheap. It closed between roughly 10 cents to 20 cents for most of 2020. It even dipped as low as 7 cents over the last week in October and the first week of November.
Then ZOM stock began its ascent. It rose to 44 cents by Jan. 5, and then $1.30 by Jan. 12. It met some resistance at those levels and then spiked again, rising to $1.91 on Feb. 5. So, Zomedica stock has risen a massive 2,628% in that short time.
I’m not implying that the same set of factors that led Robinhood to curb GameStop (NYSE:GME) apply to Zomedica. There is no indication that a Melvin Capital-type situation exists here at all.
However, I could envision a situation in which Redditors or other social media cliques decide to band together behind any volatile stock listed on Robinhood in order to drive it up. Melvin Capital was the target in the previous instance because they were on the hook to buy GameStop shares. Robinhood has infuriated many, many consumers. They might find out they get tested.
And Zomedica rose because of similarly strange circumstances. Zomedica jumped partly due to a Cameo app video by Carole Baskin promoting Zomedica. Baskin gained fame on the Netflix (NASDAQ:NFLX) smash hit, “Tiger King” and the connection to Zomedica as a veterinary company is clear.
There’s little behind ZOM stock’s rise. Surely pet care is a burgeoning area, but Zomedica has proven little otherwise.
TherapeuticsMD is another cheap Robinhood stock with popularity on its side. The underlying thought regarding restrictions is the same here for TXMD stock: it rises beyond what Robinhood can cover in clearinghouse costs and consequently faces buying restrictions.
So why might it rise?
To answer that, investors can look at Wall Street itself for one possible answer. The six analysts with current coverage of TXMD all rate it a “buy.” Further, they have given it an average target price of $6.67, which ranges as high as $10. Shares currently cost $2.17.
It looks like a slam dunk based on that math. And that might send hordes of Robinhood investors piling into TXMD shares. Robinhood might face the same problems GameStop presented in that case.
Further, TherapeuticsMD has other catalysts that may bump it up. The company serves women’s healthcare. Its products span reproductive health and contraception, all the way into menopause management. The company anticipates an EBITDA breakeven occurring in the first half of 2022. Annovera is the company’s lead product which is a form of birth control. It is predicting a 2021 quadrupling in sales relative to 2020 levels which could spike interest and prices.
Sundial Growers (SNDL)
I’m not fond of Sundial Growers. Robinhood and Reddit may well pump it up, but fundamentally the company has severe problems. I pointed these out in a recent article I wrote about SNDL stock a few weeks ago.
Basically, Sundial Growers has been poorly operated since its inception. The company is bleeding money and holds a lot of unproductive assets that can’t be jettisoned. However, there is a clear narrative which may cause Robinhood investors to pile into SNDL stock. That narrative is the simple catalyst of the federal prohibition on marijuana possibly being lifted.
With Democratic senators pushing to pass legislation that would end marijuana’s designation as a banned substance, the logic is there. Sundial Growers, as a player in the space, should rise on the positive news.
In my opinion that is illogical: in that case, Sundial Growers would simply remain a poor performer. The only difference would be that it would garner more interest. Any investment that flows into Sundial Growers due to a lifting of the ban on prohibition would have the same problem: Sundial Growers doesn’t know how to make its assets operate in a productive manner.
Nevertheless, with enough Redditors on the same page, anything is possible.
A bit about Ocugen before jumping into why it may find itself under restrictions on the Robinhood platform in the future. The company focuses on developing therapeutics for rare and underserved eye diseases. It develops therapies for diseases including macular degeneration, diabetic macular edema, and diabetic macular retinopathy.
But OCGN stock recently spiked 61.54% on Feb. 5 on news unrelated to eye disease therapeutics. Instead, Ocugen spiked on news that it is partnering with Bharat Biotech in an attempt to bring the Indian company’s Covid-19 treatment, Covaxin, to the U.S.
H.C. Wainwright analyst Swayampakula Ramakanth raised his coverage to “buy” on the news which triggered further movement in the markets. As a result, OCGN shares rose $2 to $5.25 a piece.
The company was already well regarded for its progress on eye disease therapeutics. Now though, it is fundamentally depending on emergency use approval of Bharat Biotech’s Covaxin vaccine for movement.
OCGN shares’ target price of $8 on the high end just got higher. If the Redditors on r/RobinHood latch onto this idea it could really pop. The same assumption holds true here as it applies to Robinhood: the volatility then causes the platform to miss clearinghouse capital standards and it caps buying.
The short squeeze on BlackBerry at the end of January spiked the price and then it subsided going from more than $25 back to the low teens.
There seems to be lots of optimism for BB stock’s future prospects. Many of the Reddit r/BB_Stock participants admit their belief in the company and its future prospects. Several go so far as to say that they had the opportunity to make large returns as a result of the short squeeze but held off. Their thinking is that BB stock is ultimately going to eclipse those price levels in the future.
Most people associate Blackberry with phones and not AI cybersecurity. But the company has pivoted from its past products and is focused on endpoint security more so than smartphones. It maintains Azure and AWS cloud partnerships, which is much more where the company is headed.
Blackberry is co-developing Blackberry Ivy with Amazon’s (NASDAQ:AMZN) AWS team. The system should yield lots of EV and other endpoint application data. Perhaps the momentum will swing in the other direction.
Zynga has been a strong stock from an earnings perspective for quite some time. The company has posted EPS earnings beats in the past three quarters. It has Wall Street’s favor, and it sits among the top 100 stocks on Robinhood’s platform in terms of popularity.
The company develops social games such as Words With Friends and Farmville. Zynga has 11.27% of float as short-interest. This doesn’t seem to be a massive amount, so perhaps Redditors and Robinhood users won’t enact a short-squeeze, but the potential is there nonetheless.
The company itself is interesting with its mission to “connect the world through games.” Fourth quarter 2020 and full-year 2020 results came out yesterday, and investors were buoyed by the outlook for strong 2021 bookings, fueled by the firm’s Harry Potter games.
Dillard’s looks like it could find itself in a GameStop-type situation based on short interest in the stock. Currently 31.46% of DDS stock is sold short which could lead to another short squeeze situation.
The fashion and home furnishing’s retailer posted growth numbers in its latest quarterly earnings report. While net sales decreased 26.88% in Q3 2020 relative to the prior year’s period, net income did rise. Dillard’s posted $31.9 million in Q3 2020 and $5.5 million the year before. This translated into EPS that rose from 22 cents to $1.43.
I believe if Reddit latches on to Dillard’s there is potential for a short squeeze situation to occur. Trading volume is relatively normal but DDS stock has moved a lot in the past year. It has ranged from a 52-week high of $21.50 to a high of $128 meaning volatility is there.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.