This Popular Robinhood Stock Is Poised for a Huge Sell-Off

Robinhood wants to be a stock-trading platform for the masses. The service popularized the idea of commission-free trades, forcing other online brokerages to follow suit and drop their own trading fees. "We're on a mission to democratize finance for all," Robinhood shouts in large letters on its "About Us" page.

The service is on a mission and I love the idea of providing investing tools for everybody. At the same time, Robinhood's user base includes a large number of inexperienced investors. You have to start somewhere, but beginners make a lot of mistakes. For example, some of Robinhood's most popular holdings are overly risky stocks like movie theater chain AMC Entertainment Holdings (NYSE: AMC).

Wooden dice spell the word RISK. A hand is turning the last die over from LOW to HIGH.

Image source: Getty Images.

This popular stock is far too risky

Robinhood provides a public list of the 100 most popular stocks on the platform. AMC made the cut today as a holding in nearly 137,200 Robinhood portfolios.

Unfortunately, AMC is teetering on the edge of a cliff. I wouldn't recommend this stock to anyone. Those 137,000 Robinhood investors are set up to lose a bunch of money on their AMC holdings.

Movie theaters looked like poor investments even before the COVID-19 crisis rolled in. Consumers are cutting the cord on cable services and staying away from movie theaters in favor of better and better video-streaming services. AMC's revenue growth has come from price increases and buyouts over the last decade or so.

The coronavirus pandemic closed the doors to movie theaters everywhere, reducing AMC's incoming revenue to approximately zero. The company still has bills to pay, including theater leases and daily maintenance of its assets, but there's no new money coming in. So AMC drew down its revolving credit facilities and signed up for $500 million of fresh debt in April. This week, the company got a second wind when bondholders sent another $300 million lifeline.

Two youngsters are sleeping in an otherwise empty movie theater.

This amounts to a packed movie theater nowadays. Image source: Getty Images.

AMC won't survive the coronavirus shutdown much longer. The company scheduled reopening plans as soon as the government would allow it, while promising to observe strict social-distancing guidelines and deep-cleaning procedures in partnership with Clorox (NYSE: CLX). The sooner the silver screen lights up again, the better.

But AMC has already been forced to reschedule its reopening plans several times, and Hollywood studios may not be willing to premiere new movies when the curtains open again. The virus crisis is not going away: Infections and hospitalizations are surging in places like Arizona, California, and Florida. Local governments are staving off AMC's attempts to get back in action.

A lot of Robinhood investors are betting on a turnaround that just won't come. When AMC files for Chapter 11 bankruptcy protection, the stock will almost certainly be worthless by the time AMC either shuts down, finds a buyer, or restructures its debt agreements. AMC is living on borrowed time and it doesn't look like the company will make it much longer. That's bad news for 137,000 Robinhood users.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.


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