A wild year of stock volatility has taken investors of all kinds out of the game. While the ferocity of the first quarter decline was a bit nerve-wracking for everyone, it provided an incredible opportunity for long-term investors to invest their money in high-quality companies.
The same can’t be said for short-term traders, or those chasing whatever happens to be this week or month’s hot headline on Wall Street. A quick look at the investment activity of members of the Robinhood online investment app confirms that some bad companies are being bought.
Robinhood has been particularly successful in courting young and / or inexperienced investors; the average age of its members is 31
Three of these major Robinhood stocks could go bankrupt within the next two years.
To date, fuel cell electric vehicle (EV) manufacturer Nikola (NASDAQ: NKLA) has plenty of cash. It ended its first quarter as a public company (following its reverse merger) with $ 698.4 million in cash and cash equivalents and appears to be approaching a $ 2 billion equity investment by the titan industry. General Motors (NYSE: GM) starting from Tuesday 29 September. This deal would undoubtedly give Nikola a lot of financial flexibility to realize his vision of mass production of the Badger EV fuel cell truck within the next year.
But just because Nikola has a lot of money now doesn’t mean the company’s vision will translate into success. Nikola was the target of a short report from Hindenburg Research, which exposed multiple allegations of fraud against the company and its founder, Trevor Milton. The Securities and Exchange Commission has since opened an investigation into the Hindenburg allegations.
Although investors have learned to take these short reports with a grain of salt (the companies that publish these reports often have short interests in the companies they accuse of fraud), there is a lot that simply doesn’t match Nikola. Founder Trevor Milton recently stepped down from his role as executive chairman of the board via an overnight tweet, and has since been charged with sexual abuse in two separate cases.
Additionally, Nikola intends to rely on General Motors to provide the battery and fuel cell technology that will be used in the production of the Badger. If Nikola’s technology is as impressive as the company has suggested, it’s a little odd that General Motors will be tasked with providing battery power.
Investors should expect increasing difficulties from Nikola, who, in my view, may not survive in the long term if the severe dark clouds overlying the company persist.
Brendan Kennedy, CEO of the licensed Canadian cannabis producer Tilray (NASDAQ: TLRY), he suggested in an interview earlier this year with BNN Bloomberg that he wouldn’t be surprised if another dozen cannabis stocks went bankrupt due to the drying up of industry funding. Unfortunately, I believe that his company may be the one that cannot survive in the long term.
In theory, Canada should have been the model of success for the rest of the world. It became the first industrialized country to give the green light to recreational marijuana in the modern era, and licensed producers like Tilray were expected to be clear and obvious winners. But nothing like that happened. Instead, regulation-based supply constraints crushed any hope of a substantial increase in operating margins.
Perhaps the most damning aspect of the Canadian adult market is that licensed growers have had no choice but to introduce value brands to compete with the cheaper black market marijuana. As a result, the average selling price per gram of cannabis for Tilray and its ilk has dropped like a rock. This is undermining any opportunity these Canadian marijuana stocks had to push green.
Another problem for Tilray is that its expensive acquisition of Manitoba Harvest has not produced the expected benefits. Manitoba Harvest is a hemp-based food company that Tilray bought to access the company’s profitable retail distribution network. The plan was to distribute cannabidiol-based (CBD) products throughout North America. However, CBD sales growth has slowed in the United States following the Food and Drug Administration’s decision late last year not to approve CBD as a food or beverage additive.
With more than $ 435 million in convertible notes in circulation and Tilray still losing money, its survival is not guaranteed.
American Airlines Group
Finally, despite being one of the top 10 most held stocks on the entire platform, American Airlines Group (NASDAQ: AAL) it will probably not survive without seeking reorganization through bankruptcy protection.
If there’s a bright side to American Airlines, it’s that the company was able to access capital during the steepest economic downturn in decades. The company was able to raise billions through convertible debt offers and newly issued shares. American Airlines has also qualified for a 2019 coronavirus disease (COVID-19) emergency loan of $ 5.5 billion, but that’s where the good news stops.
Basically, the airline industry looks like damaged goods. It’s impossible to tell when passengers will feel comfortable resuming their flight. This is a big deal for a company that has accumulated debt like no other airline stock and that operates in a capital-intensive but low-margin industry.
As my airline-focused Foolish colleague Adam Levine-Weinberg pointed out in 2018, American Airlines withdrew the commercial aircraft well before their period of use was up. By upgrading its fleet, the company buried itself in debt that minimized its financial flexibility before COVID-19 hit.
In the most recent quarter, American Airlines had $ 9.8 billion in cash and cash equivalents, but had total debt of $ 40.1 billion. Even after suspending share buybacks and dividend payments, the company’s future is not guaranteed. It will be squeezed by a higher interest payment for years to come and is projected to lose $ 1.4 billion in 2021, according to the current Wall Street consensus.
Put simply, the aviation industry is not built to withstand anything more than a slight economic hitch. The stiff breeze created by COVID-19 may be enough to bring down American Airlines.