Don't Let This Stock's Reputation Discourage You

Shares of investing app operator Robinhood Markets, Inc. (HOOD) have declined more than 70% since its blockbuster IPO in July 2021. Moreover, the stock has declined 42.5% year-to-date.

Pioneering zero-commission trading, Robinhood's mobile app garnered huge popularity among beginners during the height of the COVID-19 pandemic. The company was at the center of the never-seen-before frenzied trading activity in meme stocks.

However, the retail brokerage controversially restricted trading in GameStop (GME) early last year, allowing investors to only sell their positions and not open new ones. This led to significant outrage among its users.

Since the Fed’s aggressive interest rate hikes have kept the market under pressure this year, most retail investors have stayed away from trading, leading to revenue loss for HOOD.

However, this rise in interest rates is turning out to be beneficial for brokerage firms like HOOD as customers tend to be more moderate in seeking out yield from their brokers when compared to banks.

Although cash sorting is one of the reasons banks have not risen in tandem with the rise in treasury yields, brokerages, on the other hand, are relatively in a better place as the request for cash sweeps among their customers is comparatively lower.

According to Curinos’s CDA Wealth data, during the previous cycle of rising interest rates between late 2015 and mid-2019, yields on wealth accounts under $250,000 subject to cash sweeps rose only 10% as much as the Federal funds rate. On the other hand, online savings accounts and one-year certificate-of-deposit rates rose 58% and 80%, respectively.

In addition, as brokers do not indulge in longer-term lending like banks, their assets tend to be shorter-term. This is beneficial, especially in a rising interest rate environment when cash can be redeployed at higher yields. Continue reading "Don't Let This Stock's Reputation Discourage You"

3 Meme Stocks to Avoid

Meme stocks witness unusual rallies solely based on retail investors’ interest in them. Retail investors gather on social media platforms such as Reddit, Stocktwits, Twitter, and Facebook and bet on fundamentally weak stocks to trigger a short squeeze. As the skyrocketing rallies in these stocks have little to do with the fundamentals of the companies, they fail to sustain the high price levels they reach.

The meme stock mania, born during the peak of the COVID-19 pandemic, has recently returned after a pause for a few months, as evident from unusual rallies of certain fundamentally weak stocks. Since the surge in meme stocks is usually disconnected from the companies’ fundamentals, investors should shun them amid an uncertain market outlook.

The Consumer Price Index (CPI) for August rose 8.3% year-over-year. And the rampant inflation enhances the chances of the Federal Reserve maintaining its hawkish stance, pushing an already weakening economy into a recession. Thus, the stock market is expected to remain under pressure in the foreseeable future. This is a good enough reason to avoid the risk associated with meme stocks.

Hence, fundamentally weak meme stocks Robinhood Markets, Inc. (HOOD), AMC Entertainment Holdings, Inc. (AMC), and Bed Bath & Beyond Inc. (BBBY) are likely best avoided now.

Robinhood Markets, Inc. (HOOD)

HOOD operates a financial services platform in the United States. The company’s platform enables users to invest in stocks, exchange-traded funds (ETFs), gold, options, and cryptocurrencies. In addition, it provides learning and education solutions, including Snacks for business news stories, News Feeds that give access to free premium news from different sites, and first trade recommendations.

In August, HOOD announced its second round of layoffs this year, slashing 23% of its headcount by letting go of 800 employees, with marketing, operations, and product management functions of the firm being the most impacted. The company blamed the worsening of the economy, including inflation and the crypto market crash, which had reduced customer trading activity and assets under custody.

Financial services companies are also struggling with a shrinking active user base and increasing regulatory pressure. The monthly active users (MAU) declined 1.9% million sequentially to 14 million for June 2022, as consumers navigate an environment marked by high-interest rates and surging inflation.

For the fiscal 2022 second quarter ended June 30, 2022, HOOD’s revenues decreased 43.7% year-over-year to $318 million. Its operating expenses increased 21.8% from the year-ago value to $610 million. The company’s adjusted EBITDA was negative $80 million, compared to $90 million in the prior-year period.

In addition, the company’s net loss and loss per share attributable to common stockholders amounted to $295 million and $0.34, respectively.

The consensus revenue estimate of $353.60 million for the fiscal year 2022 (ending December 2022) represents a 24.7% decline from the prior-year period. The company’s loss per share is expected to come in at $1.14 for the current year. Furthermore, the company has missed the consensus revenue estimates in each of the trailing four quarters.

HOOD’s shares have slumped 21.4% over the past six months and 44.4% year-to-date to close the trading session at $10.26. Continue reading "3 Meme Stocks to Avoid"