Day Traders Love These 3 Stocks. Should You?

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We’re living in a golden age of day trading.

The popular mobile app Robinhood has ushered in a new era of stocks trading, making no-commission trades the norm in the industry. Meanwhile, Americans with extra time on their hands during the pandemic have taken enthusiastically to trading, flooding social media sites like Reddit, YouTube, and TikTok to learn more about stocks and trade tips.

Day trading comes with risks, though, as the trading strategy tries to capture short-term profits on quick movements in stocks. These types of “meme stocks,” which are popular with day traders, tend to be volatile and their moves are largely based on investor sentiment and technical analysis, rather than fundamentals. Keep reading to see three of the most popular stocks with day traders today.

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1. Sundial Growers

Over the last three months, no stock has had a higher trading volume than Canadian marijuana grower Sundial Growers (NASDAQ:SNDL). More than 500 million shares of the stock have changed hands each day, or nearly one third of its float of 1.65 billion shares. That means the average investor is holding their Sundial shares for just three days.

That heavy volume has helped make the stock highly volatile, and its status as an unprofitable cannabis grower trading in penny stock range has made it popular with traders on Reddit’s WallStreetBets board. 

However, Sundial is best avoided if you’re a long-term investor. Management has taken advantage of the recent rally, diluting shareholders by multiples in recent months, making it much less likely that the company will be able to deliver meaningful value for shareholders.

Last year, the company lost 240 million Canadian dollars on just CA$60 million in net revenue.

2. Naked Brand Group

Naked Brand Group (NASDAQ:NAKD), a New Zealand-based maker of swimwear and undergarments, was a little-known stock before it surged earlier this year, caught up in a tailwind among other penny stocks that gained popularity on Reddit.

Naked Brand shares rallied from just $0.20 at the end of last year to a peak of $3.40 at the end of January before fading since then, thanks to the heavy influence of day traders. Over the last three months, an average of 178 million shares were traded daily, nearly half of the stock’s float of 424 million. That explains why the stock has fluctuated so much over the last few months.

As with Sundial Growers, Naked Brand has used that interest to sell more shares, diluting investors by about 100 times from a year ago as the company sold shares to weather the pandemic and then to take advantage of the demand from day traders.

Naked does not release quarterly earnings reports, but in its most recent reported fiscal year, ended Jan. 31, 2020, the company lost NZ$52.2 million on revenue of NZ$90.1 million, and its revenue declined for the second year in a row. Given the challenges of the pandemic, its results were likely even worse last year.

3. AMC Entertainment

AMC Entertainment (NYSE:AMC) has been a favorite of Reddit traders since January as the stock surged alongside GameStop during the initial boom earlier in the year. The movie theater stock attracted attention because it’s a well-known consumer brand, it traded in penny stock range, and the stock had been popular among short sellers. Additionally, management’s declaration at the time that bankruptcy was effectively “off the table” after an aggressive capital raise helped spark bullish sentiment. 

Approximately three quarters of AMC’s float has been traded every day over the last three months, or 175 million out of 233 million shares, showing the stock has been highly popular with day traders. Based on those numbers, AMC is truly a day trader stock, as the average trader holds their shares for less than a day and a half.

AMC will benefit from the economic reopening, as moviegoers will return to theaters once it’s safe to do so, but like the other stocks above, shareholders have been significantly diluted so the company could avoid bankruptcy. Shares outstanding rose from 100 million last year to 450 million at the beginning of March. Based on fundamentals, it’s hard to justify AMC’s current stock price, especially considering that dilution, but sustained interest from day traders will continue to prop the stock up and make it volatile as long as the heavy volume persists.

Why it matters

Long-term investors will want to avoid stocks that day traders like because they tend to be volatile and disconnected from fundamentals, but there’s another lesson here.

As an investor, it’s helpful to know why other shareholders own the same stock as you. Speculative traders who may own some of the popular meme stocks like those above, as well as cryptocurrencies, are looking for a big payoff, leading to volatile movements. Dividend investors, on the other hand, are counting on quarterly checks, meaning any change in the dividend, especially a cut, will affect the stock. Growth investors are less risk-averse than those in value stocks, so growth stocks will also be riskier or more volatile.

If you want to see whether the stocks you own attract other long-term investors, take a look at how the average daily trading volume compares to the float. If 5% or less of the stock changes hands every day, you don’t have to worry about manipulation from day traders. If it’s less than 1%, this the kind of stock investors are buying because they believe in the fundamentals and the long-term growth opportunity. Those are the types of stocks that are most likely to be long-term winners.

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.

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