This Is Retail Investors' Favorite Stock to Own (and It's Not Apple or a Meme Stock)

For well over a century, everyday investors have been putting their money to work on Wall Street right alongside professional money managers. But over the past two years, these retail investors have rocked the boat like never before.

In late January 2021, when short squeezes were all the rage, everyday investors accounted for about 22% of total trading volume. But according to JPMorgan Chase‘s Managing Director of Big Data and AI (Artificial Intelligence) Strategies Peng Cheng, retail investors surpassed this previous record between Jan. 25, 2023 and Feb. 1, 2023 and accounted for 23% of total trading volume. In other words, the everyday investor is making their presence felt — and it pays to know what stocks they like and hold.

A person holding a smartphone that's displaying a volatile stock chart with buy and sell buttons above it.

Image source: Getty Images.

Retail investors are increasingly gravitating to time-tested businesses

Since you’ll find everyday investors at all online brokerages, there’s no perfect way to get an all-encompassing picture of what they’re holding. However, Robinhood Markets(HOOD -0.76%) online brokerage platform is geared toward everyday investors. It has no minimum deposit requirements, charges no commission for stocks purchased on major U.S. exchanges, and even offers free shares of stock for new members who deposit money with the company. Robinhood tends to be a good gauge of retail-investor sentiment.

The reason I mention Robinhood is because it provides a public and constantly updated view of the 100 most-popular securities on its platform. These are the 100 most-held stocks and exchange-traded funds in retail investors’ portfolios right now.

As you can imagine, meme stocks have been a fixture on this Robinhood leaderboard and, at one point in 2021, even dominated the top 10. But that’s not the case any longer. More than half of Robinhood’s 10 most-held stocks are profitable and time-tested multinational businesses like Walt Disney, Microsoft, and Ford Motor Company.

Tech-stock Apple (AAPL -1.76%), which is the largest publicly traded company by market cap in the U.S., has vacillated between No. 1 and No. 2 on Robinhood’s leaderboard a couple of times. Apple has easily recognizable products (iPhone, Mac, iPad), a loyal customer base, and is nothing short of a money machine. Over the trailing-12-month period, it generated $109.2 billion in operating cash flow.

But Apple isn’t currently the No. 1 stock held by retail investors. And it’s not a meme stock, either.

Retail investors are stomping the accelerator on this hot stock

According to data from Robinhood, electric-vehicle (EV) manufacturer Tesla (TSLA 2.28%) is the stock you’re likeliest to find in everyday investors’ portfolios.

Admittedly, some of you might be of the opinion that Tesla is a meme stock. It certainly has had instances where emotional short-term investing has driven its valuation markedly higher. However, Tesla is profitable on a recurring basis, and just 3.4% of its float (i.e., tradable shares) is currently being sold short. Meme stocks are typically small-cap, money-losing businesses with high short interest. Tesla doesn’t fit this definition in any respect.

Everyday investors appear to fancy Tesla for three reasons. To begin with, Tesla has enjoyed first-mover advantages in the EV space. It’s the first automaker to successfully build itself from the ground up to mass production in over a half-century.

Last year, the company produced 1.37 million EVs (its first year north of 1 million) and delivered 1.31 million EVs. With the Berlin, Germany, and Austin, Tex. gigafactories ramping up activity, producing 1.8 million EVs in 2023 isn’t out of the question.

Second, as I pointed out, Tesla is profitable, based on generally accepted accounting principles (GAAP). It’s generated a full-year GAAP profit in each of the past three years and is no longer reliant on selling renewable energy credit to deliver the green. Meanwhile, the EV divisions of competing legacy automakers are bleeding red as they invest heavily in innovation, infrastructure, and batteries for an electrified future.

And third, retail investors really seem to like Tesla CEO Elon Musk. He’s a visionary who has overseen the development of multiple Tesla EVs and has taken the company into robotics and energy storage (battery storage and solar panels). Beyond Tesla, Musk is the founder of SpaceX and the Boring Company, the owner and CEO of social media network Twitter, and the co-founder of Neuralink.

An all-electric Tesla Model 3 driving down a wet road during wintry conditions.

The Model 3 is Tesla’s flagship sedan. Image source: Tesla.

Everyday investors could be in for a rude awakening

Although Tesla has been one of the top-performing S&P 500 components over the trailing decade and has begun 2023 like it’s been shot out of a cannon, retail investors’ No. 1 stock to own is rife with red flags.

First, Tesla isn’t immune to the economic headwinds facing the very cyclical auto industry. We’ve heard from a number of new and legacy automakers that semiconductor and general parts supply shortages are still adversely impacting production. Additionally, the U.S. economy looks increasingly likely to fall into a recession this year. Industries that produce commoditized products, like autos, are liable to struggle.

This brings me to the next very important point about Tesla: It’s just a car company. In 2022, Tesla generated $81.5 billion in sales, with $10 billion on the nose coming from its energy segment and services on a combined basis. However, out of its $20.9 billion in gross profit, just $499 million came from these ancillary segments. Once other expenses are factored in, these become money-losing divisions. EVs really are everything to Tesla — and this part of its business is weakening.

If you need evidence that Tesla is struggling, look no further than its pricing tactics in recent months. In both the U.S. and China, Tesla has lowered the sale price of its flagship Model 3 sedan and Model Y SUV up to 20%. If demand were strong and inventory levels weren’t rising, we wouldn’t be seeing prices reduced by this magnitude. Even if Tesla manages to boost production to north of 1.8 million EVs in 2023, its vehicle margin is set to crater at these price points.

TSLA PE Ratio (Forward) Chart

TSLA PE Ratio (Forward) data by YCharts.

To build on this point, Tesla’s valuation makes no sense whatsoever. While most auto stocks are valued at roughly six times Wall Street’s 2023 profit forecast, Tesla is commanding a multiple of 49 times consensus earnings. Since it’s nothing more than a car company, I’d expect this valuation to contract meaningfully.

Lastly, Elon Musk is more of a liability than a help to Tesla. Aside from finding himself in hot water with securities regulators on more than one occasion, Musk has a terrible habit of promising innovations without delivering. From level 5 full self-driving to 1 million robotaxis on our roads, Musk’s promises are built into Tesla’s share price, yet remain woefully unfulfilled.

In short, I believe everyday investors are setting themselves up for disappointment if they’re counting on Tesla.