For the past three months, Wall Street has been abuzz over retail investors.
Between the Reddit movement, which began in January and has focused on highly short-sold companies, and heightened volatility since the pandemic struck last year, retail investors have flocked to the stock market. We know this because online investing app Robinhood gained approximately 3 million new members in 2020. The average age of Robinhoods user base is only 31.
While its great to see young people putting their money to work in the greatest wealth creator on the planet, its also disappointing to see what theyve been buying. According to Robinhoods leaderboard -- the 100 most-held stocks on the platform -- retail investors are predominantly buying momentum plays and penny stocks. In other words, dart throws.
Whats particularly noteworthy is that three of the most popular stocks on Robinhood are companies that run a serious risk of delisting in the not-so-distant future due to their low share prices. It looks as if nothing short of a reverse split is going to save them.
Image source: Getty Images.
On one hand, the outlook for the North American cannabis market is exciting. New Frontier Data expects the U.S. weed market to grow by 21% annually through 2025, ultimately hitting $41.5 billion in sales by mid-decade. Then theres pot-focused analytics company BDSA, which expects Canadian weed sales to more than double to over $6 billion by 2026. Theres certainly opportunity for some North American pot stocks to thrive. However, Sundial doesnt look to be one of them.
Sundials management team eliminated the debt on the companys balance sheet and built up a mountain of cash ($719 million Canadian). However, its done so by diluting the daylights out of those shareholders who stuck by the company. Between Sept. 30 and Feb. 28, Sundial issued more than 1.15 billion shares of stock. To boot, the company recently authorized an at-the-market offering that could result in the issuance of up to $800 million in additional shares. Based on its April 6 closing price of $1.02, were could be talking about another 784 million shares.
With an absurd 1.66 billion shares outstanding and approximately $0.34 per share in cash, Sundial is going to have a difficult time keep its head above the $1 minimum listing requirement for the Nasdaq exchange. Itll also be practically impossible for the company to ever generate meaningful earnings per share with 1.66 billion shares outstanding now, and possibly even more in the near future.
Wall Street looks negatively on reverse splits as a sign of company weakness, Sundial may have little choice but to enact one to avoid eventual delisting.
Image source: Getty Images.
Another ultra-popular stock that could be delisted by the end of the second quarter if it doesnt enact a reverse split is dry bulk shipping company Castor Maritime (NASDAQ:CTRM).
Mind you, theres a bull case for Castor. A rebounding global economy should see dry bulk transports for goods like grains, steel, cement, sugar, and fertilizers increase. Castor doubled its fleet in 2020 from three vessels to six and more than doubled its fleet to 14 ships since the year began. Its a relatively younger shipping company thats attempting to ramp up its vessel ownership right as the global vaccination campaign kicks into high gear. And it certainly hasnt hurt that Castor, like Sundial, has been a big hit with Reddit-based retail investors.
Unfortunately, Castors answer to raising the capital needed to expand its fleet has been to issue mountains of stock. Heres a truly jaw-dropping statistic: Between Dec. 31, 2019, and today, Castor Maritimes outstanding share count has risen from 3.27 million to 707.3 million -- thats not a typo. Worst of all, the company recently filed to sell another 192.3 million shares in a direct offering. Most of these registered direct offerings also come with warrants, whichll cap any significant upside in the companys share price and could balloon its outstanding share count well above 1 billion.
Even though it operates as a petroleum products shipper, Id encourage investors to check out whats happened with TOP Ships. TOP Ships has followed the exact same blueprint of dilution and reverse splits to expand its fleet, and its long-term shareholders have effectively been wiped out. Shareholders in Castor Maritime may eventually share the same fate.
Image source: Getty Images.
A third popular Robinhood stock that looks as if itll eventually need a reverse split to right the ship is clinical-stage veterinary drug and diagnostics developer Zomedica (NYSEMKT:ZOM). Its currently the 16th most-held stock on Robinhood.
Shares of Zomedica have been on fire over the previous six months. Through April 5, it was up a cool 1,259%. But the head-scratching thing is most of these gains are due to euphoria rather than anything tangible. For example, Zomedica rallied in January following a YouTube namedrop from Tiger King star Carole Baskin -- a mention she was paid to make. It was also a popular penny stock among the Reddit traders in February.
Since Zomedica is primarily focused on researching new therapeutics and diagnostics that can be used to treat companion animals, it took the opportunity to use its large run-up in share price to raise cash by selling stock. Since the year began, the company has issued more than 305 million shares.
Heres the problem: Zomedica now has 947.3 million shares outstanding. While it likely has enough cash to avoid any additional dilutive offerings for the next couple of years, its going to be difficult to justify a valuation that keeps its share price above $1. Despite now generating revenue from the sale of its Truforma diagnostics system, Zomedica is valued at nearly 70 times Wall Streets projected sales for 2023. Its also nowhere near profitability.
Its a strong candidate to enact a reverse split sometime over the next 12 to 18 months.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.>
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