Bubble, Bubble, Toil And Trouble
Summary
- Recently, there has been a huge influx of new retail investors using platforms such as Robinhood.
- This is at least partly responsible for the disconnect between share prices and their underlying value based on the economy.
- But, there is one tool on the Robinhood platform that I believe is particularly bad for driving the creation of bubbles in the price of some stocks.
- Investors chase popular stocks as the bubble inflates but often end up holding the bag when it bursts.
There is a huge disconnect between stock prices and the economy right now as almost all of the market losses from the COVID-19 scare have been recovered, but we still have massive unemployment, a huge drop in GDP, and a downturn in the economy that is going to last well into next year.
One of the drivers of the recovery in stock prices has been a huge influx of retail investors, similar to what happened in the lead-up to the tech bubble in 2000. I think the whole market is overpriced and in bubble territory right now, but, in this article, I am going to focus on one particular aspect of the Robinhood trading platform that I believe is causing price bubbles in individual stocks, especially stocks with a limited public float.
The influx of new retail investors
Since the markets hit their lows as a result of the COVID-19 scare last February, the number of new retail investors using platforms such as Robinhood that provide the opportunity to easily trade small lots with no commissions increased. In a two-month period, the number of Robinhood stock positions has doubled (see chart below). The graph cuts off on May 2nd, the numbers are probably much higher now.
E-trade and Charles Schwab have also seen large increases in the number of trading accounts, with Schwab seeing a 98% year over year increase in the number of trades in the first quarter and the number of active accounts at Interactive Brokers increasing by 28% year over year, as of April.
Robintrack and "herd" investing
Robinhood has introduced an investment tool that allows users to see the total number of investors that have positions in any stock at any time. The Robintrack site provides investors with a list of stocks arranged by popularity (i.e. the number of holders with positions in that stock) and also the changes in popularity, either total popularity or percentage change. The Robintrack leaderboard is updated every hour and provides a chart of the number of holders and the price for each stock. The data can also be downloaded for a more detailed analysis. Robinhood has this to say about it:
One of the most useful things that you can do with the data that this site provides is to figure out how people are reacting to moves in the market. Depending on if people are buying the dip, getting onboard during a pump because they think it's going to go higher, or taking profits, this data lets you observe each of those different situations and plan your own trading accordingly"
It is interesting information, but I have some serious doubts about its usefulness. There are many good reasons for choosing a stock, but popularity is not one of them. The worst time to buy is when everyone else is doing the same, but I believe many retail investors are using popularity as an investment thesis. It seems to me that a serious drawback of Robintrack is that it encourages "follow the herd" investing and leads to price bubbles.
I present below a few examples where I believe the Robintrack data has created a bubble in the price of a stock.
Indivior (IZQVF) - Lunacy in pink
Indivior is an extreme example of what can happen when the herd moves into a thinly traded pink sheets stock.
The stock with the highest percentage increase in popularity amongst Robinhood users during the week beginning March 18th was a little-known pharmaceutical company that sells drugs for opioid addiction treatment. Indivior trades on the London Stock Exchange under the symbol INDV and its ADR receipts (equivalent to 5 shares each) trade in the USA on the pink sheets (OTCPK:INVVY). Until last week, the stock was very thinly traded, many days, it didn't trade at all, but, on March 19th, on no news that I have been able to find, the number of Robinhood users holding the ADR receipts (the green line on the graph) jumped sharply and continued rising all week, driving the price from $2.84 to $9.55.
Indivior ADR receipts - price and number of users holding - Source: Robintrack
The chart below (from EDGAR online) shows the trading volumes and prices for INVVY during that period. Tuesday, March 19th, was the day when trading took off, Wednesday was a day of profit-taking when the initial investors may have exited, and the euphoria took hold again on Thursday and Friday.
If you multiply the trading volume by the share price and divide by the changes in the number of users, the average trade value during that period works out to less than $2,000 per trade. It appears that the entire trading volume and price increases in Indivior stock were generated solely by Robinhood users trading the stock amongst themselves.
When the market opened after the long weekend on Tuesday, March 25th, the lunacy continued, another 5,000 Robinhood users jumped in driving the price higher and higher. The peak was reached at 2.29 p.m. when 25,800 ADR receipts changed hands for $39.99 each (see chart below from Edgar online). Around the same time, INVVY disappeared from the Robinhood tracking system, presumably having been halted at Robinhood, though the ADR receipts are still trading on the OTC market and the stock still trades in London.
While all this was happening, the equivalent stock could be purchased on the London Stock Exchange for less than $4 (one ADR on the pink sheets is equivalent to 5 shares and the stock traded for around 60 pence on the LSE at the time). In the one trade at the peak, someone paid $1 million for ADR receipts when the equivalent stock that could have been bought on the London exchange for about $100,000.
As I write this (June 3rd), the price of Indivior's ADR receipts has fallen to $5.93, trading volume is back to normal and there are no open bids. I cannot think of any explanation for this bubble, other than crazy retail investors using Robintrack to chase a stock based on its popularity rating. A professional trader would never have bought those ADR receipts when the equivalent shares could have been bought for a fraction of the price on another exchange.
The Tesla (TSLA) mini-bubble from February 2020
Thinly-traded stocks will always be vulnerable to price swings caused by retail investors buying and selling in herds, but larger, more heavily traded stocks are not immune.
Here's a look at Tesla's trading pattern when it hit a new high in February 2020:
On February 3rd, we see an influx of about 14,000 new holders driving the price up from $650 to $780, this upward move continues the following day as the number of holders jumps by another 10,000 driving the price to a new high of $964, but, late in the day, there is a sell-off and the stock closes at $887. Next morning, a few intrepid investors buy the dip, but the price drop continues, panic sets in, and by mid-afternoon, 17,000 Robinhood users have exited the stock and the price has fallen to $713.
The Tilray (TLRY) bubble from September 2018
A bubble formed in the stock price of cannabis company Tilray in September of 2018:
Note how the bubble inflated over the course of a week to a peak of $240 with the addition of about 17,000 new holders, but the collapse happened within a day after a drop of only 4,000 holders. Most of those who participated in the run-up was left holding the bag after the price collapsed.
Tilray, currently, has even more Robinhood stockholders than it had at the time of the bubble, but the share price has dropped to less than $10. The reason is that the IPO lock-up period expired in June 2019 allowing the original pre-IPO investors to take profits as retail investors have been buying; there are now many more shares on the market.
The Beyond Meat (BYND) Bubble of July 2019:
Beyond Meat was another bubble that happened during the lockdown period after the IPO.
The Beyond Meat bubble had been building up over a period of about six weeks, but most of the action took place in the final week as about 7,000 Robinhood investors jumped into the stock and drove the price from $140 to a high of $240. The bubble was burst when Goldman Sachs announced a secondary offering of 3 million shares and waived the lock-up period, putting extra shares onto the market. A few Robinhood investors were lucky enough to get out, but most were left holding the bag.
Today's bubble
Genius Brands (GNUS) is today's bubble stock. It is a small company in the business of children's digital TV programming. Its share price was recently boosted when it raised $9 million at $1.20 per share in a purchase agreement with longstanding investors to finance a newly announced cartoon channel. Its maximum yearly revenue has been around $5 million and it has never been profitable. Trading volume today (June 3rd) is nearly twenty times the daily average and an influx of 48,000 Robinhood users in the last two days has driven the price up by more than 100%. As I write this, it is early afternoon and the number of shares traded already exceeds the public float by a factor of ten.
Never follow the herd
There are literally dozens of these bubbles every week as Robinhood users pile into stocks based solely on popularity. Even companies that have filed for bankruptcy (e.g. Hertz (HTZ) and LATAM Airlines (LTM)) have seen prices increases after filing as a result of herd investing at Robinhood.
There is a lesson to be learned from these bubbles. When the herd moves into a stock - stay out. It is tempting to jump quickly in and out to try to make a fast buck, but the bubbles deflate very quickly and most of the retail investors are left holding the bag.
This article was written by
Analyst’s Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am short TSLA using long term puts, I also trade in TSLA both long and short using an option strategy, but only small amounts for amusement more than investment.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (97)
When I saw the RObinhood popularity lists, I suspected something like this could happen but did not bother investigating further. Thanks for taking the time to put this together.
Comments3409 | Following
I lost huge trying to ride daily calls on AAL today. Almost completely out of money. Stepping away until November 20 market close- I sold the $9 puts for November but my effective cost at November 20 close is 9, not 7- because of the losses trading today- really sick! Well, we'll see- probably AAL loses 80% by November now. @kimbillro @jaberwock
Meanwhile, investors with the guts and money to take the risks have been seeing massive wins on a weekly basis.
If you believe that companies like Wells Fargo, Air Canada, Sienna, SmartCentres, Shell, and other major industry leaders will be around by 2030, then the current pandemic is just loud noise along your investment journey.
If you are trying to time the market, you might as well go to the roulette table and bet red/black.
Sometimes you'll win and feel smart, sometimes you'll feel lose and say I knew it....Either way you're wasting time.
It's caused by recognition of Tesla's disruption potential.
You think it's high now. You ain't seen nothin' yet.
what the bird didn't see was that WINDOW!!!
ouch!!!
The daily trading thread is where the pump happens (a stock ticker is floated, and people understand that it's going to be "hot", for example, DraftKings). Sometimes a ticker is floated under the guise of a "due diligence" post, as happened with Lumber Liquidators.It's market manipulation through social media herding.
