Investing in 2020 has been an adventure. In a roughly six-month span, the widely followed S&P 500 lost over a third of its value, clawed everything back, and even gained. It was the steepest 30%-plus bear market decline we’ve ever seen, as well as the quickest rebound to new highs from a bear market bottom in history.
Besides giving long-term investors opportunities to scoop up great companies at bargain prices, this heightened volatility has also lured millennial and/or novice investors into equities. Online investing app Robinhood, which is best known for its commission-free trades and gifts of stock shares to new members, has signed up millions of people. The average age of these new short-term-focused traders is 31.
Unfortunately, not all of the companies that Robinhood investors flock to are Wall Street favorites. Wall Street hates the following three stocks that you can find among Robinhood’s top 50 holdings.
It’s no secret that millennial investors are enamored with electric vehicle (EV) manufacturers, and none is more popular than Tesla (NASDAQ:TSLA). Robinhood’s investors are known to chase momentum stocks. Since Tesla was recently up over 1,000% on a trailing-12-month basis at one point, it fits the profile.
Yet Tesla isn’t that well-liked on Wall Street. Keeping in mind that underperform and sell ratings are rare (often because investment banks don’t want to burn bridges with the companies they’re rating), September featured eight strong buy or buy ratings, 15 hold ratings, and 10 underperform or sell-equivalent ratings. Put another way, fewer than 1 in 4 Wall Street analysts views Tesla as a stock to buy right now.
Why the skepticism? One reason might be Tesla’s lack of a full-year generally accepted accounting principles (GAAP) profit. Tesla has often leaned on EV credit to bolster its adjusted profitability, but hasn’t been able to generate a full-year GAAP profit. That’s a bit worrisome for a company valued at almost $400 billion.
Tesla’s valuation is also a tough pill to swallow. Putting aside its triple-digit forward price-to-earnings ratio for a moment, Tesla is on track to deliver roughly 500,000 EVs in 2020. Comparatively, other major auto stocks are producing anywhere from 3 million to 8 million vehicles annually. Tesla’s valuation is nearly equal to many of the largest traditional automakers put together, yet it remains unprofitable on a full-year GAAP basis.
Tesla is a stock I wouldn’t buy because I also question the sustainability of its competitive advantages. Tesla has certainly benefited from its first-mover advantage in mass-produced EVs and its battery range. But it’s not going to be the only show in town. General Motors, Ford, and pretty much every major automaker is tossing billions (or tens of billions) of dollars at EVs and autonomous vehicles in the coming years. I’d say Wall Street is right to question Tesla’s valuation here.
Millennial and novice investors are also gung-ho on marijuana stocks, with Canadian licensed producer Aurora Cannabis (NYSE:ACB) once holding the title of most-held stock on the entire Robinhood platform.
However, there’s been a pretty clear bifurcation on favorability when it comes to North American pot stocks. Weed companies in the U.S. are thriving, while our neighbors to the north are struggling badly. That’s meant little love for Aurora Cannabis. According to Robinhood, only 17% of analysts currently have a buy rating on Aurora, with 78% at hold and 6% at the equivalent of a sell rating.
It’s certainly not hard to see why Wall Street is skeptical of the company. Since mid-March 2019, Aurora Cannabis’ stock has lost more than 96% of its value. Once expected to lead North America in marijuana output, Aurora has closed five of its smaller cultivation farms, halted production on its two largest projects to conserve capital, and sold its greenhouse in Exeter, Ontario, which it never retrofit for cannabis production. Though Aurora is selling more cannabis of late, its value brands are dominating those sales, which means operating margins are hurting.
Though at least some of Canada’s shortcomings can be blamed on regulatory issues, problems specific to Aurora deserve a wag of the finger from investors. The company has been issuing stock in droves to raise capital for funding acquisitions and day-to-day operations. In six years, Aurora’s reverse-split-adjusted share count has ballooned from 1.3 million to 115.2 million, meaning it’s constantly diluting existing shareholders.
Aurora also grossly overpaid for each and every one of its acquisitions since August 2016. In fiscal 2020, the company wrote down well over $2 billion Canadian in goodwill and intangible assets tied to these deals.
Aurora Cannabis has shown little to inspire confidence and should be avoided.
Robinhood investors are also fans of Big Oil. Integrated oil and gas giant ExxonMobil (NYSE:XOM) is a top-50 holding on the platform that Wall Street doesn’t exactly love.
In September, 25 Wall Street analysts had a rating issued on the company, with two calling it a strong buy, 18 labeling it a hold, and five designating the company an underperform or sell. That’s less than 10% of Wall Street investment banks believing ExxonMobil was worth buying as of last month.
Why no love for ExxonMobil? In the short run, the company is contending with a historic plunge in crude oil demand tied to the coronavirus disease 2019 (COVID-19) pandemic. Although economic activity is rising, there’s no way for any developed economy to fully step on the gas until there’s a workable vaccine. This means continued pressure and potential oversupply on crude demand for the foreseeable future.
The other problem is the continued push toward renewable energy sources in developed countries. Make no mistake, oil isn’t going away anytime soon — but the developed world’s reliance on fossil fuels may begin to wane, putting ExxonMobil’s future growth prospects into doubt.
For what it’s worth, ExxonMobil is the only one of these three hated stocks that I believe is worth buying. As an integrated company, it’s able to lean on its downstream refining and petrochemical operations when crude prices weaken. It also has ample production opportunities overseas to meet developed and emerging market demand.
This is the first time in 35 years that ExxonMobil has been so cheap relative to its book value. In my view, this makes it a compelling buy at its current price.