The Robinhood trading app has stoked the interest of young investors. Although these traders have found some potentially lucrative stocks, some of those stocks could become potential investor pitfalls. To this end, knowing when to sell shares will become a critical skill if these investors are to succeed.
Part of determining the right time to sell involves recognizing financial or business conditions that make staying in a stock untenable. Unfortunately, many of the most popular stocks on Robinhood face such issues. Given those challenges, Robinhood investors may want to re-evaluate their holdings in Aurora Cannabis (NYSE: ACB), Fitbit (NYSE: FIT), and Ford Motor Company (NYSE: F).
1. Aurora Cannabis
During the marijuana stock bubble in 2017 and 2018, Aurora Cannabis had become one of the largest producers of marijuana. However, once interest in pot stocks waned, Aurora's production abilities became a huge disadvantage as the market experienced a massive oversupply. This sent Aurora stock below $1 per share, forcing the company to institute a 1-for-12 reverse stock split.
The company has since suspended construction on two large production facilities and closed five of its smaller production facilities. It also sold its massive Exeter greenhouse for one-third of its purchase price.
These sales were not enough to clean up the company's finances. In its third quarter, Aurora Cannabis reported a loss of CA$1.37 ($1.01) per share. Analysts expect a total loss of CA$13.62 ($10.03) per share for the year, with the cash burn continuing into fiscal 2021. Investors should expect more stock dilution and asset sales as the company struggles to stay in existence. Neither of these actions is likely to boost its stock price.
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Fitbit is a well-known name facing deep uncertainty. Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) is currently attempting to buy out the company, but the merger is facing issues with regulators in Europe. Alphabet has offered to not use health data for targeted ads. Whether that can help the Google parent win approval from the EU remains unclear.
Unfortunately, this makes Fitbit stock a bet on whether the deal happens. Alphabet offered to pay $7.35 per share for the company, which currently trades in the $6.90 per-share range. A completed deal earns current investors an increase of about 6.5%.
However, prospects appear dire for Fitbit shareholders if the deal does not occur. Fitbit stock could easily see a rapid decline to the sub-$5-per-share level it saw before the company announced the deal.
It may fall much further from there. Fitbit will have to compete with Alphabet's Android and Apple's iOS ecosystems under such a scenario. As Fitbit is a company struggling to turn a profit, investors could see their stake wiped out if that occurred. Robinhood traders should consider all of these possibilities before deciding to stay in Fitbit stock.
3. Ford Motor Company
Interestingly, Ford stock has become the most popular ticker on the Robinhood app. Perhaps the single-digit nominal price or its bet on electric vehicles (EVs) attracts these investors.
Nonetheless, if investors took a careful look at the company's financials, they might reconsider. This year, investors have had to endure last quarter's net loss of $2 billion due to the production shutdowns brought about by the coronavirus pandemic. Investors also suffered a dividend suspension that cost them their $0.60 per-share annual payout.
This is on top of a stock decline exceeding 60% over the last year. Although Ford stock has recovered much of its lost value, it trades at about a 35% discount to its 52-week high.
However, the problems do not end there. The company faces more than $100 billion in long-term debt as well as pension liabilities of $11.1 billion.
Admittedly, Ford's prospects looked promising amid these debt and pension concerns until recently. A high dividend, improving China sales, and an upcoming move into EVs gave the company a rosy outlook.
Still, the stock price actually declined during that time. Hence, even if conditions improve for Ford, it could easily not translate into gains for Ford stockholders.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Fitbit. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.