Irrespective of how lengthy you’ve got been an investor, there’s merely nothing that would have ready you for what 2020 has provided up to now. In a roughly four-month span, traders have handled a couple of decade’s worth of volatility as a result of unprecedented coronavirus illness 2019 (COVID-19) pandemic.
After all, durations of panic and heightened volatility have usually served long-term traders nicely. That is as a result of each stock market correction in historical past (save for the present correction) has ultimately been erased by a bull market rally. Shopping for nice stocks and hanging onto them for an extended time frame is a technique with a excessive success price.
Picture supply: Getty Photos.
Nonetheless, panic and volatility can have destructive penalties, too. On-line funding platform Robinhood, which has been particularly profitable in courting youthful/millennial traders with the lure of commission-free trades and the reward of free stock when you open an account, is one such occasion of the risks that may come up during times of heightened volatility.
Whereas a few of its members have a long-term mindset, the standard “Robinhood investor” is a short-term dealer who’s normally chasing right now’s hottest stocks. Since predicting short-term actions cannot be finished with any accuracy, it is a harmful sport for younger traders to be enjoying.
Worst of all, a number of the hottest stocks on the Robinhood platform are completely terrible corporations. Listed below are 5 such stocks that retail traders apparently love, however which it is best to keep away from just like the plague.
The Nikola Badger electrical truck. Picture supply: Nikola.
Being brutally sincere, the complete electrical automobile (EV) business, together with NIO (NYSE:NIO), Tesla (NASDAQ:TSLA), Workhorse Group, and Tortoise Acquisition, look to be in a single huge retail trader-fueled bubble. However none is priced extra out of whack than Nikola (NASDAQ:NKLA).
Quick-term merchants have watched Tesla and NIO defy gravity for weeks, and so they merely determine that Nikola and its $20 billion market cap can do the identical. In any case, Nikola did unveil its Badger EV truck, and preliminary deposit demand following that unveil was presumed to be robust.
However there’s an issue right here: Nikola hasn’t offered a single EV or fuel-cell automobile… ever.
The corporate hopes to start manufacturing of the Badger subsequent yr, nevertheless it’s a veritable actually that snags and hurdles will come up. Each Tesla and NIO have handled surprises of their very own, resembling NIO abandoning its plan to construct a manufacturing unit in Shanghai to make its personal EVs, and Tesla delaying the debut of latest models on numerous events over the previous decade. If traders suppose that Nikola goes from idea to full-bore manufacturing on the flip of a swap, they’re in for a giant shock. Count on Nikola to lose a considerable amount of cash over the following few years.
Picture supply: Getty Photos.
Millennial-favorite marijuana stock Aurora Hashish (NYSE:ACB) is one other a type of head-scratcher investments. Whereas marijuana stocks have just about all carried out poorly because the finish of the primary quarter of 2019, Aurora has been particularly terrible, with its share price down round 90% over the trailing 16-month interval.
At one time, Aurora was anticipated to steer the world in hashish output, and it had entry to 2 dozen markets outdoors of Canada. This recommended that it could use economies-of-scale to provide very low-cost, high-quality weed, and have the ability to export a major quantity of this marijuana to medical marijuana-legal overseas markets. Sadly, regulatory-based provide considerations have led to bottlenecks in Canada, and only a few abroad markets are accepting hashish imports. Consequently, Aurora has shuttered 5 manufacturing services, halted development on two others, and offered a 1-million-square-foot greenhouse.
However the true catastrophe right here is the corporate’s stability sheet. Aurora Hashish continues to dilute the heck out of its shareholders with at-the-market choices and all-share acquisitions. It is also lugging round goodwill that accounts for greater than half of its whole property. My expectation is that Aurora Hashish will write down greater than half of its whole property.
Picture supply: American Airways.
Robinhood traders have additionally been obsessive about brand-name stocks as COVID-19 rebound candidates. Maybe none matches this thesis greater than American Airways Group (NASDAQ:AAL). Earlier than the stock market fell off a cliff in late February, roughly 14,000 Robinhood accounts owned American Airways. Immediately this determine is above 659,000 accounts.
Though American Airways was capable of safe bailout funds from the federal authorities tied to the coronavirus pandemic, there’s little argument that it is the worst-of-breed amongst main airways. As of its most up-to-date quarterly submitting, it had near $3.6 billion in cash and cash equivalents, however was sporting an unpleasant $34.1 billion in whole debt. Thoughts you, this does not embrace a $3.5 billion bond providing dangled in late June that bore a 12% — sure, 12% — rate of interest. With borrowing charges close to file lows, this price alone tells you all the things it’s essential know in regards to the threat tied to American Airways’ enterprise model.
It is also unclear when, precisely, issues will return to regular for the airways. It might take years earlier than capability returns to ranges seen in 2019. That is worrisome for shareholders, as a result of American was required to halt share buybacks and its dividend as situations of receiving monetary help tied to COVID-19. There’s actually not a viable motive to personal any main U.S. airline stock, not to mention the one with the worst stability sheet.
Picture supply: Getty Photos.
Robinhood traders have additionally been infatuated with attempting to catch falling knives within the oil and gasoline business. The extremely unstable driller Callon Petroleum (NYSE:CPE) had fewer than 4,000 accounts holding its stock in early March. Immediately, greater than 110,000 Robinhood members are onboard for the trip. The issue is, that trip may find yourself breaking hearts and emptying wallets.
In July 2019, Callon introduced that it could purchase Carrizo Oil & Fuel in an all-stock deal for a $3.2 billion price tag, greater than half of which was tied to the idea of Carrizo’s debt. The deal was hailed by each corporations as transformational, with the mixed entity having elevated scale within the Permian Basin and Eagle Ford Shale in Texas, improved cash circulate potential, and value synergies. Then COVID-19 hit, and this bullet-point checklist of advantages has been thrown out the window.
As of its most up-to-date quarter, Callon Petroleum had almost $3.Three billion in debt (most of which is due in 2023 or later) and solely $14.eight million in cash and cash equivalents. If Q1 2020 was any indication, merely servicing the corporate’s debt goes to price greater than $80 million a yr. And, to make issues worse, Callon’s creditor’s decreased its obtainable line from $2 billion to $1.7 billion, with $1.35 billion already drawn down. Callon seems to be to be inching its means towards an eventual chapter reorganization, and that’ll probably wipe out frequent stockholders.
Picture supply: Getty Photos.
Lastly — and perhaps probably the most baffling funding of the group — Robinhood traders have piled into rental automotive large Hertz (NYSE:HTZ). As a reminder, Hertz declared Chapter 11 chapter on May 22, however has seen the variety of Robinhood accounts holding its stock explode from round 44,000 to nearly 148,000 because the announcement.
Although there was some hypothesis that Hertz would challenge frequent stock throughout its chapter proceedings (a transfer that the corporate has now recanted), and that an out of doors get together may be concerned with buying some or all of its property, the very fact stays that Hertz is bankrupt. Whereas it will have the ability to restructure its debt and stay in enterprise throughout these proceedings, it’s extremely probably that shareholders aren’t going to obtain something when Hertz remerges from chapter. In different phrases, some 148,000 Robinhood traders might see their Hertz funding go to $0.
And in case you do not consider me, take it straight from the horse’s mouth. Earlier than Hertz shelved its share providing, a submitting from the corporate with the Securities and Change Fee had this to say:
We additionally count on our stockholders’ fairness to lower as we use cash available to help our operations in chapter. Consequently, there’s a vital threat that the holders of our frequent stock, together with purchasers on this providing, will obtain no restoration underneath the Chapter 11 Instances and that our frequent stock can be nugatory.
Keep away from Hertz, and each different stock on this checklist, just like the plague.