Don’t Let This Stock’s Reputation Discourage You

Don’t Let This Stock’s Reputation Discourage You

Posted On October 28, 2022 12:45 pm

Shares of investing app operator Robinhood Markets, Inc. (HOOD) have declined more than 70% since its blockbuster IPO in July 2021. Moreover, the stock has declined 42.5% year-to-date.

Pioneering zero-commission trading, Robinhood’s mobile app garnered huge popularity among beginners during the height of the COVID-19 pandemic. The company was at the center of the never-seen-before frenzied trading activity in meme stocks.

However, the retail brokerage controversially restricted trading in GameStop (GME) early last year, allowing investors to only sell their positions and not open new ones. This led to significant outrage among its users.

Since the Fed’s aggressive interest rate hikes have kept the market under pressure this year, most retail investors have stayed away from trading, leading to revenue loss for HOOD.

However, this rise in interest rates is turning out to be beneficial for brokerage firms like HOOD as customers tend to be more moderate in seeking out yield from their brokers when compared to banks.

Although cash sorting is one of the reasons banks have not risen in tandem with the rise in treasury yields, brokerages, on the other hand, are relatively in a better place as the request for cash sweeps among their customers is comparatively lower.

According to Curinos’s CDA Wealth data, during the previous cycle of rising interest rates between late 2015 and mid-2019, yields on wealth accounts under $250,000 subject to cash sweeps rose only 10% as much as the Federal funds rate. On the other hand, online savings accounts and one-year certificate-of-deposit rates rose 58% and 80%, respectively.

In addition, as brokers do not indulge in longer-term lending like banks, their assets tend to be shorter-term. This is beneficial, especially in a rising interest rate environment when cash can be redeployed at higher yields.

Wolfe Research had tracked mass-market brokerages in the last cycle of rising rates, where its net interest income tripled during that period, compared to the 25% gain across all Federal Deposit Insurance Corporation-insured banks.

Wolfe analyst Steven Chubak said, “Retail brokers are a cleaner play on rates right now.” HOOD is offering a 3% cash rate to some of its customers who are opting to pay for its Gold service leading to organic asset growth.

Although the stock market is down significantly this year due to the rising interest rates, HOOD’s stock has gained 8.2% in price over the past month and 12.4% over the past three months to…

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