When the curtain closes on 2020, few investors will be sad to see it leave. The coronavirus disease 2019 (COVID-19) pandemic has led to the most volatile equities market in history. During the first quarter, the benchmark S&P 500 lost 34% of its value in less than five weeks. This has been followed by a ferocious rally off of the March 23 lows, as well as more than 30 new all-time highs from the technology-heavy Nasdaq Composite.
Interestingly, volatility can actually be a great thing for long-term investors, as it usually gives them an opportunity to buy into great businesses as a discount.
However, it can have a dark side as well.
Over the past couple of months, we’ve witnessed retail investors of online investing platform Robinhood pile into some of the riskiest names on Wall Street. Whatever is moving fastest seems to be the flavor of the week for many of these mostly young and/or novice investors.
But if there is good news, it’s that many of these millennial/novice investors have also been coming around to tried-and-true businesses in recent months. By this I mean that Robinhood’s leaderboard (i.e., its most-held stocks) is beginning to fill up with established and/or high-growth businesses.
Here are the five stocks Robinhood investors simply can’t stop buying over the past month.
Even though Robinhood investors are known for chasing penny stocks and obscure companies, there isn’t a stock on the platform that’s been added to more portfolios over the past month than Apple (NASDAQ:AAPL). Nearly 162,000 net members own a stake in the tech kingpin, and Apple has vaulted to the third-most-held stock on the entire platform, behind only General Electric and Ford.
Aside from the fact that Apple has been rallying almost unrelentingly since late March, investors are probably most taken by the company’s branding. Apple has an almost cult-like following of customers that wait on the edge of their seats to buy new products. This incredible loyalty has played a key role in keeping customers within its ecosystem of products and services, which is a big reason it’s able to generate such robust cash flow year in and year out.
Apple’s innovation is also very important to its success. CEO Tim Cook is adamant that Apple can become a service-oriented company. In recent quarters, wearables and service revenue have grown by a double-digit percentage, which is great news considering that service revenue generates juicier margins than product sales.
Robinhood investors definitely can’t get enough of electric-vehicle (EV) manufacturer Tesla (NASDAQ:TSLA), with a net of almost 142,000 members adding the stock to their portfolios over the past month. Despite its nominally high share price, fractional-share ownership has allowed Tesla to become the eighth-most-held stock on the platform.
The “Why Tesla?” argument essentially boils down to EVs being the future of the transportation industry. Although EVs represent only a small fraction of total sales in the U.S., EV sales have grown by at least 22% on a year-over-year basis since 2011, with the exception of 2015 and 2019. Since Tesla has first-mover advantage in the EV space, at least in terms of mass-production, and it’s successfully built up a charging network throughout significant portions of the U.S., it looks to have a good shot at raking in the profits in the years to come.
Of course, whether $271 billion is a reasonable market cap for a company that’s yet to generate a generally accepted accounting principles (GAAP) full-year profit, and whose CEO (Elon Musk) is habitually unable to meet touted product launch timelines, is another story.
Another popular company that Robinhood investors have been piling into recently is tech stock Microsoft (NASDAQ:MSFT). The second-largest company in the U.S. by market cap has had its stock added to nearly 124,000 net Robinhood members’ accounts over the past 30 days. Microsoft sits behind Apple as the fourth-most-held company on the platform.
The beauty of owning Microsoft is all in the margins. This is a company that’s still reaping significant rewards from its legacy software products (Windows and Office), but has also seen significant growth and exceptionally high margins from its innovative new cloud offerings. In the recently ended quarter, which may I add was negatively impacted by COVID-19, Microsoft managed to deliver 50% year-over-year constant-currency growth for Azure.
Beyond its margins, Microsoft is perhaps the safest stock in the world to invest in. Credit ratings agency Standard & Poor’s labels it one of the only two AAA rated public companies, suggesting it has the utmost confidence in Microsoft’s ability to pay its bills. On an aggregate basis, Microsoft also pays out more in dividends each year than any other public company in the United States.
The fourth-most popular stock added over the past month is clinical-stage biotech company Moderna (NASDAQ:MRNA), which saw close to 110,000 net Robinhood members add the company. Since the year began, Moderna’s ownership on Robinhood has grown from roughly 5,600 members to almost 320,000.
Unlike some of the other names listed here, Moderna is a perfect example of Robinhood investors chasing a hot story rather than a surefire business model. Moderna is one of a small handful of biotech stocks to get a big lift due to its coronavirus vaccine research. In July, Moderna announced results from its phase 1 dosing study of mRNA-1273, noting that neutralizing antibodies were observed in patients of all three dosing tiers.
Undoubtedly, there’s a huge market for a COVID-19 vaccine, but it’s unclear if this is a market that can be owned by only a few vaccine developers. With the U.S. Food and Drug Administration only angling for modest vaccine efficacy, it wouldn’t be surprising if multiple drug developers were eventually supplying a vaccine. That makes a $28 billion market cap on Moderna seem awful risky.
Fifth and finally, there’s Amazon (NASDAQ:AMZN), which only edged out Eastman Kodak by a net of 668 accounts over the past 30 days. In total, close to 85,000 net members added Amazon stock to their portfolios, bringing total ownership to 422,000 members.
There appear to be two reasons investors are infatuated with Amazon. First, it has everything to do with the company’s visible retail presence. Amazon’s marketplace was already dominant before the coronavirus pandemic hit. Now, it’s become even more of a go-to option for consumers unable to shop in a grocery store. According to analysts at Bank of America/Merrill Lynch, Amazon holds 44% of all e-commerce market share in the United States.
The other reason Robinhood investors love Amazon is because of its cloud-service operations, Amazon Web Services (AWS). Sales for AWS grew by a hearty 29% during the coronavirus-impacted second quarter to $10.8 billion, and they generated $3.36 billion of Amazon’s $5.84 billion in operating income. Since cloud margins are considerably higher than retail and ad-based revenue, AWS is Amazon’s key to rapid operating cash flow growth.