‘Dumb Money’ Fuels the Stock Market. That’s Good for Robinhood.

Robinhood benefits from higher trading activity among individual investors. (Dreamstime)

If Wall Street has learned anything in the past few years, it should be that professional investors shouldn’t ignore the so-called dumb money. That’s because retail investors, in addition to not being so dumb after all, now make up a bigger portion of the market’s daily trading volume.

According to a report from Jefferies on Thursday, retail trading accounts for about 20.5% of total volume, compared with less than 15% for hedge funds and long-only institutional investors.

Retail traders have become an increasingly important part of the investing landscape over the past 15 years. While the percentage of trading volume from retail investors has declined a bit from a peak of about 25% in 2020 and 2021, when GameStop led the meme-stock market mania, it has still more than doubled from 10% in 2010.

Jefferies listed stocks that the firm’s research analysts rate at Buy but also have high trading turnover and low institutional interest. On the roster are Reddit, SoFi Technologies, Celsius Holdings, e.l.f. Beauty, Advance Auto Parts, United Airlines, Caesars Entertainment, Five Below, Vital Farms, and Wayfair.

But the surge in demand from retail investors could also be good news for Robinhood and several other large-capitalization stocks that Jefferies said are favorites of the retail trader crowd. In addition to Robinhood, Jefferies listed Tesla, Palantir Technologies, MicroStrategy, Coinbase Global, Carvana, and Super Micro Computer, as well as Reddit and SoFi.

Robinhood seems to stand out in that crowd. Not only is it a stock that retail investors are embracing, the trading platform also benefits directly from the surge in activity among those people.

Analysts at Goldman Sachs said in a report Thursday that June trading data from Robinhood showed that there was stronger equity and options volume so far this month than expected, while crypto trading was a little weaker.

They raised their target for Robinhood’s stock price to $91 from $82, saying that they needed “to account for higher market multiples.” That means Goldman thinks the recent rebound in stocks to record highs suggests that Robinhood deserves a richer valuation.

But how rich is too rich? The Goldman analysts based their $91 target on a multiple of 46.5 times forward earnings estimates.

That is slightly cheaper than the P/E of nearly 55 times for Coinbase. But it is a sizable premium to the P/E of 19 for Charles Schwab and the multiple of 25 for newly public rival eToro.

Jefferies suggested this may not matter much. The analysts say that retail investors may be more tolerant of companies with weaker fundamentals than institutional investors.

They looked at the past six years of market performance and found that “when retail is a bigger portion of trading, quality fails to matter.” Stocks with high returns on equity beat low ROE stocks by a wide margin when interest from retail investors is lower.

That isn’t to say that Robinhood is a lower-quality company. But the “dumb money” may be looking more at stock charts than P/E ratios, income statements, and balance sheets.

Robinhood’s shares are sizzling this year, soaring more than 120%. There’s nothing dumb about cashing in on that wave of momentum.

Write to Paul R. La Monica at paul.lamonica@barrons.com