Robinhood traders cash in on the market comeback that billionaire investors missed

Key Points
  • Retail investors capitalized on the market comeback, unlike the billionaire hedge fund managers who said stocks would retest their lows.
  • Millennial-favored stock trading app Robinhood saw new investors piling into stay-at-home stocks and those most beaten down by the economic shutdown, like airlines, casinos and hotels. 

One 26-year-old Robinhood trader made $1,500 in less than 24 hours betting on a beaten-down airline stock, while many so-called experts on Wall Street warned about buying into an overvalued stock market that was bound to tumble again amid the coronavirus pandemic

Last Thursday, Lequon Godbolt, purchased a call option for American Airlines that made him $200 on the millennial-favored stock trading app.

After seeing reports that the airline was increasing domestic flying for summer travel, Godbolt bought another call option minutes before the close. When the market opened higher last Friday after a surprisingly positive jobs report, Godbolt raked in his profits. 

"I just started taking it seriously about two months ago," Godbolt — a New York resident— told CNBC. "I've been watching AAL since the beginning of that time and I felt eventually, once Covid relaxed, markets would move up."

Godbolt is not alone is his success trading this market. One Chicago-resident flipped his sister's stimulus check into nearly $10,000. 

Robinhood traders lived up to their outlaw name during the coronavirus market downturn. The young investors booked profits — trading stocks with some of the best returns in the past two months — while other Wall Street veterans were left scratching their heads. 

"There's nothing like momentum begetting momentum," Tim Welsh, founder and CEO of wealth management consulting firm Nexus Strategy, told CNBC. "The aspect of just access is really driving a lot of this and the whole upward tick in the markets, again, just fuels demand."

Young investors, like Godbolt, appeared to have a prescient understanding of the market, unlike the billionaire hedge fund managers who said stocks would retest their lows. Longtime investor Stanley Druckenmiller — who misjudged equities' comeback — said Monday that the market's strong performance over the last three weeks has "humbled" him and that he underestimated the power of the Federal Reserve.

Even legendary investor Warren Buffett sold his stake in airlines during the pandemic. Of course, the Berkshire Hathaway chairman is a long-term, bargain shopper and the airline industry's long-term outlook is yet to be determined. 

V-shape after all?

Signs are pointing to a V-shaped recovery — a sharp fall in economic activity followed by a dramatic rise — in the economy. This theory was rejected by economists and investors who found it unrealistic due to the detrimental ramifications of the mandated shutdown of the U.S. economy. 

Stocks have soared in June, helped by the historic Labor Department jobs report that showed the U.S. economy added a record 2.5 million jobs in May. Wall Street was calling for a decline of 8.3 million. The unemployment rate dropped to 13.3%, far better than the expected 19.5% rate. 

The technology-heavy Nasdaq Composite hit a new all-time high on Monday, the first of the major averages to make back all of its losses from the Covid-19 sell-off. The S&P 500 went positive for the year on Monday. Despite this, investors and economists have been skeptical of the stock market's swift bounce back and reiterated their bearish predictions about what the coronavirus pandemic would do to the market and economy. 

Meanwhile, Robinhood — and other major e-brokers — saw a flood of new clients, seeing a "generational-buying moment" during the coronavirus market sell-off. The Silicon-Valley start-up said it saw a historic 3 million new accounts in the first quarter, while stocks experienced their fastest bear market and worst first quarter on record.

Robinhood — which serves more than 10 million customers with an average client age of 31 — saw new investors piling into stay-at-home stocks and those most beaten down by the economic shutdown, like airlines, casinos and hotels. Traders also bought into speculative names like Hertz and Nikola. 

"We see a lot of buying activity of specifically industries that were impacted by the pandemic," Robinhood co-founder and co-CEO Vladimir Tenev said at the Piper Sandler Global Exchange & FinTech Conference on Wednesday. Investors traded "a lot in airlines, a decent amount of buying in videoconferencing, streaming services, some biopharmacuetical as well," said Tenev. 

TD Amerirade's millennial clients followed a similar rationale in May, the firm's chief investment strategist, JJ Kinahan, told CNBC on Monday. The favorite stocks of the firm's younger clients' last month included Draft Kings and MGM Resorts, as well as Coca-Cola and JPMorgan Chase. 

Pharma soars 

Pharmaceutical stocks were how Rodney Henderson, 27, has turned his sister's $1,200 stimulus check into almost $10,000 since mid-April, the Chicago resident told CNBC.

"People are going to be spending their stimulus check on a bunch of consumer stuff and so I encouraged her to get a Robinhood account to be able to invest while the market is down, knowing its going to uptrend," Henderson said. "At the time the market was very red. That is the perfect time for us to capitalize off of, especially during the pandemic." 

The brother-sister duo piled into Moderna, Sorrento Therapeutics and Arca Biopharma. Shares of Moderna are up more than 400% from their March low on hopes the company an come up with a vaccine for the coronavirus. 

"While the coronavirus was happening, I think the biggest uptrend in stocks that was going on was in pharma," Henderson said. "A lot of companies that are going to improve our lives after the coronavirus." 

Henderson wasn't the only one using the rescue funds to speculate in the stock market. Securities trading was among the most common uses for the government stimulus checks in nearly every income bracket, according to software and data aggregation company Envestnet Yodlee. 

Genius Brands 

Henderson's biggest gain was buying into children's media company Genius Brands. He bought 3,500 shares at 33 cents and recently sold the stock at $10.82 per share, a more than 3,100% gain. 

Shares of Genius Brands are up more than 700% in the past month and are also on the list of Robinhood's most traded stocks, according to Robintracker, which tracks Robinhood account activity but is not affiliated with the company. Genius Brands is a producer of animated children's shows on Netflix and Amazon. 

Artificial intelligence company Remark Holdings is another one of Henderson's investments. 

"With the casinos, a lot of them are installing thermal cameras to make sure people are at the right temperature," said Henderson. "Remark Holdings is very big on thermal cameras, so I think they're going to be around a lot of companies from hotels to airports to Disneyland and also casinos."

Henderson is booking profits after his investments paid off. 

"I'm going to sell the majority of them and make sure I have the cash for the upcoming weeks or days, knowing the market may, or may not, come down," Henderson added. 

To be sure, zero commissions and fractional trades are contributing to the rush of new investors in the stock market. 

"The stock market is so much more democratized," said Welsh. "Everyone sort of has access to it now and it's free. I still think that's the main driver here is that trading is free, fractional shares are here and just the enthusiasm for seeing something that, you may or may not have that much experience with, seems to go up at a very steady pace of the last couple months."

JJ Kinahan: Millennials have been more bullish
JJ Kinahan: Millennials have been more bullish

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