The pandemic has also created the most volatile environment for stocks in history, as measured by CBOE Volatility Index. We have witnessed the vast S&P 500 lost more than a third of its value in five weeks in the first quarter, then saw the benchmark make its strongest quarterly gains in the second quarter since 1998.
Among Robinhood’s most popular stocks, these are the three I’ll never sell
While this volatility can be nauseating at times, it’s generally a good thing for long-term investors. After all, every market correction in history has finally been erased by a bullish rally. This means that all significant downward movements in the market should be bought by long-term investors.
But this volatility also gave birth to what is now called the “Robinhood trader”.
Robinhood is an online investment application particularly suited to attracting younger and / or novice investors. While I’m all for Millennials and Gen Z stepping away from their financial futures and investing their money in the stock market, many of these Robinhood investors lack a long-term mindset. Instead, they’re usually after today’s hottest stock. This has left Robinhood’s rankings (meaning its most popular member-owned stocks) littered with terrible companies.
But among these horrible companies, there are a few stellar stocks that members have picked up (hopefully for many years to come). The following three companies all rank in Robinhood’s 25 Most Popular Stocks, and are current holdings that I never intend to sell.
Bank of America
Let’s start with my oldest holding, a giant of financial centers Bank of America (NYSE: BAC). On Robinhood, BofA is the 16th most popular stock, with around 342,000 members holding a stake. For context, less than 111,000 members owned BofA shares at the start of the year, so this is a very popular addition when correcting the coronavirus.
There is no denying that bank stocks are susceptible to weakness during times of economic contraction or recession, and Bank of America will be no different. The Federal Reserve’s accommodative monetary policy has pushed lending rates down, which will ultimately translate into lower interest income for the big banks. At the same time, uncertainties related to COVID-19 are likely to increase delinquencies on mortgages, auto and personal.
But these are relatively short-sighted concerns. The BofA that was hammered by regulations and bad credit during the financial crisis is long gone. What you are seeing today is a well-capitalized national bank that is built for long-term success.
Among monetary center banks, Bank of America is often the most interest sensitive. This means that there will be a sharp increase in interest income once the Fed begins to hike rates again, which is expected in 2023.
Bank of America has also been successful in controlling its non-interest spending, which has played a role in expanding its results. As more and more of its members switch to digital banking and / or mobile banking on their smartphones, BofA has been able to close some of its physical branches. The trade-off is very favorable, as digital / mobile transactions are only a fraction of the cost of in-person retail banking transactions.
Given CEO Brian Moynihan’s emphasis on return on capital programs during times of economic expansion, I see no reason to sell my stake in Bank of America.
Although this is a more recent addition to my portfolio (added during the March meltdown), the social media powerhouse Facebook (NASDAQ: FB) is another popular Robinhood action that I never intend to sell. On Robinhood, Facebook is the 25th most owned stock, with over 238,000 members holding a slice of the pie. That’s almost double the number of Robinhood cast since early January.
Running a successful business in the social media space might sound easy, but it isn’t. Facebook is the model by which other companies try to emulate. At the end of March, Facebook had 2.6 billion monthly active users (MAU), as well as 2.99 billion monthly active people as a family. This family figure includes other owned assets, such as Instagram and WhatsApp. The point is, there is no other social media platform where advertisers can reach nearly 3 billion pairs of eyeballs. This is what makes Facebook and its advertising pricing power so special.
Another reason Facebook is such a monster is that it hasn’t even kicked its growth engine into high gear yet. Although it monetizes Facebook and Instagram with ads, it hasn’t done much when it comes to monetizing Facebook Messenger and WhatsApp. These are four of the seven most visited social platforms on the planet, and Facebook actually only generates consistent cash flow from two of them. Once Facebook opens the floodgates on WhatsApp and Facebook Messenger, its growth rate and cash flow potential could skyrocket.
I’m also a huge fan of what Facebook could do beyond advertising. Make no mistake, advertising has to remain a successful business for Facebook, especially with periods of economic expansion that last considerably longer than periods of economic contraction or recession. But I’m excited about the potential of payment solutions or maybe a premium streaming service developed through the Facebook platform.
It’s a business with seemingly limitless potential that I would be a fool (with a little “f”) to sell.
One last popular Robinhood action that I’m not going to part with is Amazone (NASDAQ: AMZN). Currently, the e-commerce giant is the 12th most owned stock on the Robinhood platform, with more than 393,000 members holding a stake. For context, that’s almost quadruple the number of Robinhood investors who owned Amazon just five months ago.
While most businesses struggled during the COVID-19 pandemic, Amazon has actually been a beneficiary, thanks to its online marketplace. According to Bank of America / Merrill Lynch analysts, Amazon controls 44% of all online sales in the United States. That’s about six times higher than its next closest competitor.
Amazon was able to use its online dominance to coerce over 150 million people to sign up for Prime members around the world. The fees Amazon generates from Prime help offset its razor-thin retail margins and give the company yet another tool in its arsenal for slashing prices from physical retailers. It also doesn’t hurt that the membership model keeps those 150 million and more people locked into Amazon’s ecosystem of products and services.
But as I have said over and over for months, the real engine of growth for the company is its cloud services segment, Amazon Web Services (AWS). AWS is a set of cloud infrastructure services that primarily help small and medium businesses build their clouds. With the COVID-19 pandemic pushing more businesses online than ever before, AWS is expected to be busier than ever.
Best of all, AWS’s margins are significantly higher than what Amazon generates from retail, ads, and streaming content. Therefore, as AWS grows and represents a larger percentage of the company’s total sales, operating cash flow is expected to skyrocket.
Amazon is the type of growing stock that you can set and forget.