sifting through the fallen angels rubble

Robinhood (HOOD) went public last July at $38 per share. It shot up to $85 almost immediately …before beginning a downhill journey that resulted in the stock recently cracking below $10 a share.

I’ve been buying the stock recently, something I find a little surprising.

I firmly believe that the key to success for anyone in the stock market is to know more than most other market participants about the valuation and earnings prospects for the stocks in one’s portfolio. Better to know a lot about a small number of areas than end up being the dumb money in lots of places. For me, the key sectors have been Energy (where I spent my first decade as an analyst and PM–but not so useful now), Consumer Discretionary and IT.

I’ve generally tried to stay away from Financials. I’ve had colleagues who are stars in this sector, who seem to know, loan by loan, where a bank’s major exposures are and how fully (or not) it has reserved for potential losses–in the way I used to know, field by field, how a given oil and gas company was positioned. I don’t. And I’m not that willing to put in the time and work needed to make an intelligent decision.

I did open a HOOD account early on. I wasn’t favorably impressed. Nice colors. No information. Hard-to-believe easy in qualifying to trade options–sort of like a casino delivering you to the games with the lowest payout. I know that things have improved since then, but…

Still, I ended up buying HOOD. How so?

Over the past six months, the US stock market has performed as follows:

–S&P 500 +2.4%

–NASDAQ -6.6%

–ARKK -45.4%

–HOOD -69.0%.

To my mind, especially in a market like today’s where extreme valuations, both + and -, abound, it makes sense to root around among the market’s big losers to try to find low valuations. A plain vanilla value strategy, in other words.

What jumped out to me about HOOD is that it has book value (i.e., shareholders’ equity) of about $9 a share, almost all of that in working capital, meaning it can relatively quickly be turned into cash. As I’m writing this, the stock is at $12.82, or about 1.4x book.

HOOD seems uniquely able to appeal to younger traders/investors, a very desirable market that has so far eluded other brokers.

A number of discounters have been acquired over the past few years. Acquisition prices seem to have been around 2.5x book. Two remaining public ones are Charles Schwab (SCHW) and Interactive Brokers (IBKR). Both trade at about 2.8x book. The chairman of IBKR recently commented that HOOD’s return on its customer assets is 50% higher than IBKR’s.

Four thoughts:

–on a price/book basis, HOOD seems very cheap

–how could this stock ever trade at $85, or almost 10x book in a world where 3x seems pricey? Talk about crazy!

–the biggest risk I see is that the founders have voting control of HOOD through the special shares they own. So, unlike traditional value stocks, holders are highly dependent on their willingness and ability to grow the company. Here, what happens with Peloton (PTON) will be highly instructive

–why is a growth investor like me, who has written even in this post about the virtues of sticking to what you do well straying into value territory? One answer must be, whether I fully recognize this or not, is that I don’t feel comfortable adding to the tach and consumer discretionary names I already own.

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