What a 12 months it has been for Wall Street. Panic and uncertainty surrounding the coronavirus illness 2019 (COVID-19) pandemic despatched equities to their quickest and steepest bear market decline in historical past in the course of the first quarter. However data have been damaged on the way in which again up, too, with the benchmark S&P 500 taking lower than 5 months to reclaim contemporary all-time highs.
Although volatility could be scary, it is nearly at all times a welcome sight for long-term buyers. That is as a result of it permits affected person buyers to purchase into high-quality corporations at a perceived low cost.
Picture supply: Getty Pictures.
Nevertheless, volatility additionally attracts inexperienced buyers who hope to make a fast buck within the stock market. Not often, if ever, does the short-term technique of chasing volatility through penny stocks work out effectively.
Take on-line funding platform Robinhood. Recognized finest for providing free trades and gifting a small parcel of stock to customers after they open accounts, Robinhood has primarily attracted millennial and/or novice buyers. A fast look on the on-line platform’s leaderboard (i.e., the stocks most-held by members) is telling. Although you may discover a number of high-quality long-term holdings, penny stocks and usually terrible corporations appear to fulfill many Robinhood buyers.
There are three exceptionally well-liked holdings on Robinhood specifically that would lose 50% or extra of their value.
A Tesla Model S plugged in for charging. Picture supply: Tesla.
Though it is probably the most popular stock on Wall Street in the mean time, and it is the eighth-most-held one on Robinhood, electric-vehicle (EV) maker Tesla (NASDAQ:TSLA) has a mind-boggling valuation.
There are causes for buyers to be optimistic about Tesla. The corporate has surpassed supply expectations in 2020 so far. CEO Elon Musk is extremely motivated and vested within the firm’s future, proudly owning roughly 21% of Tesla’s excellent shares. It definitely would not damage that Tesla caters to a extra prosperous group of auto consumers who’re much less prone to alter their consumption habits throughout financial hiccups.
However in the event you ask me if this group of catalysts is worth a $382 billion market cap, my reply is a powerful no.
What we have witnessed from Tesla in 2020 is a whole wipeout of what had been an unrelenting quick place within the firm. We have additionally seen short-term buyers piling into the stock as a result of they concern lacking out. Even the corporate’s introduced 5-for-1 stock cut up has added nearly 50% to its share price. None of those catalysts has any true elementary bearing on Tesla.
Tesla has managed to create a mass-produced EV, and at one time it had early-mover benefit on this area. Nevertheless, the hole in battery efficiency between Tesla and its friends has shrunk. Quite a few well-funded opponents with a long time of historical past behind their manufacturers are actually producing high-performance EVs. In 2018, Ford introduced plans to take a position $11 billion in EVs by 2022, whereas Normal Motors supplied plans this March to spend $20 billion on EVs and autonomous automobiles by means of 2025. In different phrases, Tesla’s runway is getting awfully crowded.
Emotional investing has proved again and again that it might solely carry an organization’s valuation up to now, and Tesla’s share price could possibly be considerably decrease over the subsequent six to 24 months.
Picture supply: American Airways.
American Airways Group
One other very talked-about Robinhood stock that would face some severe future draw back is American Airways Group (NASDAQ:AAL).
Whereas Tesla has a feel-good story behind its ascension, it is unclear why Robinhood buyers have anointed American Airways because the fifth-most-held stock on the platform. It may look “low cost” just because its share price has retreated to almost an eight-year low, however there’s just about nothing redeeming about airline stocks — and particularly American Airways — in the mean time.
The plain knock in opposition to the airline business is that now we have no clue when passengers are going to return to the skies at pre-pandemic ranges. A coronavirus vaccine may encourage vacationers to begin flying once more, but it surely could possibly be years earlier than now we have any semblance of normalcy for airways. That is an enormous drawback for a capital-intensive, low-margin business that merely can not maintain losses for lengthy durations.
With regard to American Airways, it has been capable of elevate cash by means of debt choices. Whereas this staves off any near-term chance of chapter, it is also ballooned the corporate’s complete debt to $40 billion. Even when American Airways pulls by means of this pandemic with out having to reorganize beneath the safety of chapter, its curiosity funds are going to eat up a considerable portion of its working revenue for a very long time to come back.
Plus, the monetary assist American Airways acquired as a part of the Coronavirus Support, Reduction, and Financial Safety (CARES) Act means no extra share buybacks or dividends for shareholders. The corporate’s capital return program was arguably the one motive to even take into account proudly owning American Airways, and now it is gone.
With no ensures that American Airways even survives the pandemic with out in search of chapter safety, I imagine it is honest to say that its stock may nonetheless have vital draw back.
Picture supply: Getty Pictures.
A 50% decline may additionally await Canadian licensed marijuana producer Aurora Hashish (NYSE:ACB). Aurora was really the most-held stock on Robinhood for months, till a 1-for-12 reverse cut up in May apparently liquidated the holdings of any members with fewer than 12 shares previous to the cut up. These days, it is the 11th-most-held firm.
I think about it is in all probability a little bit of a head-scratcher as to why a fast-growing marijuana stock would even make this listing. The reply to that query is twofold.
On a macro stage, Canada was extensively anticipated to guide the world with its legalization of adult-use weed in October 2018. Nevertheless, Well being Canada delayed the launch of high-margin spinoff merchandise by a few months. In the meantime, regulators in choose provinces have struggled to assessment and assign dispensary retailer licenses. These points imply that Aurora Hashish has needed to take care of provide shortages in some provinces and main bottlenecks in others.
On a company-specific foundation, Aurora has partially come to phrases with its issues. A revamped administration workforce has slashed prices and reworked its debt covenant to the purpose that the corporate may not default later this 12 months. To keep away from default, Aurora should produce constructive adjusted earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) by fiscal Q1 2021.
Nevertheless, Aurora Hashish’ cash place continues to be a priority, and the corporate has had few avenues with which to boost capital past promoting frequent stock. Aurora has been a serial diluter of its shareholders over the previous 4 years.
What’s extra, the corporate is lugging round $2.42 billion Canadian in goodwill. Aurora grossly overpaid for many of its acquisitions and can possible be required to take a number of writedowns within the foreseeable future. These impairment expenses could possibly be the catalyst that pulls the rug out from beneath the corporate’s shareholders.