Robinhood, an online brokerage launched in 2015, has become a sensation with individual investors. It pioneered zero-commission trading and fractional ownership of stocks, making it simple for anyone to invest, even with just a few dollars.
But are Robinhood's users choosing great stocks? We asked three Motley Fool contributors to take a look at the most commonly held stocks in Robinhood portfolios and to share their favorite picks from among them. Their choices: Starbucks (SBUX -0.38%), Apple (AAPL -2.41%), and Ford Motor Company (F -0.92%).
Future digital growth at a rare valuation
Jon Quast (Starbucks): The COVID-19 pandemic has forced restaurant chains to adapt or die. Businesses in the food-service industry are currently prioritizing things like off-premise sales, contactless payment, and digital ordering -- and doing so out of necessity. But these moves also make restaurant operations more efficient and profitable even when there's not a health crisis. That may help explain why Starbucks is prioritizing its digital channels now and doubling down on them for the future.
In U.S. urban areas, the company will be launching a new store format that's 100% to-go: Starbucks Pickup. The locations using it will be a mix of new sites and existing cafes that will be converted to the format. The company admits these locations likely won't generate the same sales volumes as its regular stores. However, their smaller footprints and lower labor expenses should make them higher-margin sites.
Image source: Starbucks.
Starbucks is also increasing its emphasis on its app-loyalty program. At a conference in June, CFO Patrick J. Grismer said spending increases when customers use the app, both because users purchase more often and spend more per purchase.
However, one pain point for customers has been limiting the Starbucks app's adoption: Users have to load money onto Starbucks gift cards, which are then used for payment. But later this year, management plans to eliminate this and allow direct credit card payments through the app. When that impediment is removed, it's only logical to expect a new wave of people will adopt the app, leading to an increase in comparable sales.
These recent moves remind us why Starbucks is a top stock choice, and why Robinhood users are right to favor it. And while many stocks are hitting all-time highs again, the coffee giant still provides good value for investors today. It trades at about 25% below the highs it reached in 2019, and its dividend currently yields more than 2%, historically high for this stock.
An Apple a day
Danny Vena (Apple): Apple is a perennial favorite among investors, and it's the sixth-most widely held stock among traders on Robinhood. There's no doubt the pandemic has weighed heavily on the tech giant's business, yet even in the midst of these challenges, there are plenty of reasons why Apple remains a smart investment.
The iPhone accounted for 55% of Apple's revenue in 2019. Yet even as sales of the iconic smartphone dipped nearly 7% year over year in the company's fiscal second quarter, other business lines took up the slack. Apple's wearables, home, and accessories segment grew by 23% year over year and now accounts for nearly 11% of the company's revenue. At the same time, the services segment continued its impressive growth, tacking on 17%. It now represents 23% of Apple's revenue. Even if the heady growth of the iPhone continues to slow, Apple has other growth engines ready to compensate.
The company's e-commerce operations also kicked it up a notch to fill the void left by the closure of its Apple Stores. In fact, its retail operations produced a quarterly revenue record, powered by phenomenal digital sales growth.
It's important to note that while sales of the iPhone are down, they're by no means out. In a move that now seems almost prescient, Apple announced earlier this year that it would revive the iPhone SE. The device, which went on sale in mid-April, boasted a starting price of $399, a bit more than half the cost of a base model iPhone 11. This lower-priced device will no doubt appeal to budget-conscious consumers.
Then there's the expected "super cycle" coming as the result of the transition to 5G. Apple has an installed base of more than 1.5 billion devices in the wild, of which nearly 1 billion are estimated to be iPhones. That's a large market of people potentially soon to be in the market for a 5G upgrade.
With all that going for it, it's little wonder Apple stock is a favorite among Robinhood investors.
Robinhood's no. 1 stock is a value-priced icon
John Rosevear (Ford Motor): Ford is the top stock on Robinhood's "100 Most Popular" list. And while I think it's a solid choice, we have to acknowledge that it hasn't done very well over the last five years.
Part of the problem (before the COVID-19 pandemic, anyway) is that Ford has been working through what CEO Jim Hackett calls a "redesign" of the company, intended to improve the automaker's "fitness" to handle the sweeping changes underway in the auto industry.
That has included some steps that looked painful (or even like missteps) to auto investors who didn't understand the plan. For example, when Ford discontinued all of its sedan models in the U.S., it gave up some market share. Not only did that decision hit the automaker's sales numbers and earnings in the near term, it also looked bad to investors who didn't know that it had more profitable replacements on the way.
But now, with the all-new (and much more competitive) Explorer and Escape at dealers, a new F-150 heading to dealerships before the end of the year, and buyers eagerly making online reservations for exciting (and profitable) new vehicles like the Bronco and the electric Mustang Mach-E, Ford's future is becoming clearer and brighter. But that future isn't fully reflected in its stock price yet. That's an opportunity for investors.
Even amid the pandemic, Ford managed an exciting launch for its new Bronco on Monday. Image source: Ford Motor Company.
One more thing to note: Ford suspended its dividend for the duration of the COVID-19 crisis, but management has promised it'll be back as soon as things turn around. At $0.15 per quarter, the level Ford maintained for several years before the pandemic, that would amount to a roughly 8.8% yield at Ford's current stock price.
You may have to be patient for a few quarters to get it, but -- like the Bronco and the Mach-E -- it should be worth the wait.
