The battle between retail investors of GameStop (NYSE:GME) and its institutional bears reached a pinnacle on Jan. 26 as the stock reached an all-time high of $380 per share. Over the past year, enthusiasm among traders of the legendary r/WallStreetBets subreddit was mostly responsible for its mouth-watering 7,600% return. As hedge funds who bet on the brick-and-mortar video game retailer lost multiples of their initial investment on their GameStop short, they began frantically cutting their losses by buying the stock back at whatever price possible. This added even more fuel to the flames and led to an unstoppable, monstrous rally in the share price.
After GameStop’s spectacular short squeeze, investors are now wondering if other heavily shorted stocks that are popular among contrarian Reddit investors, such as AMC Entertainment Holdings (NYSE:AMC), CEL-SCI (NYSEMKT:CVM), and BlackBerry (NYSE:BB), could replicate GameStop’s return and make shareholders wealthy in a very short period of time.
As it turns out, discipline becomes paramount when the value of one’s holdings goes up so high and so fast. While GameStop stock may have had genuine reasons to rally, not all three of the stocks mentioned can claim similar justification. Let’s take a look at which ones to buy and which ones to avoid.
1. AMC Entertainment
In the past five days, shares of movie theater chain AMC Entertainment took a 180-degree turn after years of decline. During that period, the stock more than quadrupled in value. Approximately 79% of the company’s outstanding shares are sold short.
Due to a mix of pandemic containment measures, competition from digital streaming services, and customers’ fear of contracting the coronavirus, AMC took a dramatic hit to its bottom line. In the third quarter of 2020, its revenue declined from $1.32 billion in the prior year’s quarter to less than $120 million. That’s less than the $214.3 million the company pays in rent every quarter to keep its venues operational. It should be no surprise that it had to take ample asset impairments and depreciation, which all boils down to a quarterly net loss of $901.2 million.
There is a degree of truth as to why AMC is actually a decent stock. For starters, there is a dedicated community of moviegoers who love the experience of sitting comfortably on a recliner seat, grabbing a drink and popcorn, and watching a movie on the big screen with state-of-the-art speakers nearby. But this dedicated fan base isn’t enough to make up for AMC’s huge debt problem.
Even before the pandemic started, it had a crushing debt obligation of $5.8 billion compared to less than $500 million in cash. Not only are AMC’s margins razor-thin, but it also has more than $5 billion in lease payments on top of its debt.
Its capital management, as well as revenue growth, are polar opposites of what GameStop has to offer. Even after a recent $506 million equity raise and $411 million in debt financing, the company is still in dire need of cash. For these reasons, I think AMC’s new financing efforts will only delay the problems it has to face. If investors are looking to cash in on companies that became a part of the GameStop craze, they should look elsewhere.
CEL-SCI is a development-stage biotech that is seeking to develop a novel immunotherapy treatment, Multikine, for head and neck cancer. Despite its noble goals, the company has its fair share of skeptics: Nearly 30% of its shares are shorted. In fact, the CEO of CEL-SCI, Geert Kersten, tweeted the following on Jan. 26 after a short squeeze caused its shares to go up 87% in the span of one month:
People like you [short-sellers] gaming the system are the reason why shorties are targeted these days. You make up the rules to screw the rest of the investors. In the case of $CVM though, the shorties are losing and paying 60% interest. And I fully expect to crush them with good Phase 3 data.
So what’s all the controversy about? As it turns out, Multikine is CEL-SCI’s only late-stage candidate. The experimental therapy is going through the final stages of phase 3 data collection and statistical analysis, with results expected any day. Multikine’s phase 3 clinical trial has been going on for a decade, even though it was supposed to conclude in December 2015. The discrepancy between the actual and estimated trial completion time has caused CEL-SCI to become a contested stock.
For Multikine to be successful in its investigation, it must demonstrate at least 10% improvement in survival among patients with head and neck cancer when combined with standard of care (SOC) treatments, relative to those who received SOC alone. The trial protocol requires 298 deaths out of 795 participants in the aforementioned cohorts to measure the efficacy. Since we know that the trial did not finish on time, we can deduce that the trial patients are living longer than expected.
However, we do not know whether the phenomenon is due to Multikine keeping patients alive, the SOC keeping patients alive, or both (and one having a more significant effect than the other). CEL-SCI’s official position is that the historical survival rates for head and neck cancer patients treated with SOC are quite low. Therefore, Multikine must be responsible for keeping patients alive for this long.
On the other hand, short-sellers argue that it’s not uncommon for investigators to underestimate the power of the SOC in enhancing patients’ survivals during clinical trials. Hence, they allege the investigational drug is futile.
All of this matters because large-cap biotechs can acquire development-stage competitors that successfully bring just one immuno-oncology therapy to market for more than $20 billion. CEL-SCI’s market cap is just about $850 million, so the stock would without a doubt become a multi-bagger if it can bring Multikine past the finish line. Likewise, since it only has about $40.5 million in assets and negligible revenue, it will likely trade down to zero if Multikine disappoints.
Overall, I recommend interested investors check out a more scientific analysis of the bullish and bearish claims in this article and decide from there. No matter which side you take, it is clear that CEL-SCI is a high-risk, high-reward stock. The next one on our list, meanwhile, is far less controversial.
When people think of BlackBerry, many still picture its hard-keyboard smartphones that took the world by storm in the early 2000s, and that subsequently lost all of its market share to iPhone and Android competitors. That seems like a consensus among those betting against the company as well, as nearly 10% of the company’s outstanding shares are sold short.
For years, BlackBerry stock went nowhere — sitting in the shadows, undervalued and under-appreciated. Then, the stock tripled in the past month.
While there were no material developments to its core operations, investors finally realized that BlackBerry had managed to overcome its smartphone stint and reinvent itself as a leading enterprise software tech company. In fact, its automated driving systems and vehicle software are found in over 175 million cars around the world today. Last month, it also landed an agreement with Amazon to jointly develop a cloud-based vehicle software database.
In spite of its growth potential and spectacular rally, it trades for just 12 times price-to-sales (P/S), which is near average for tech firms across the market. As the demand for self-driving cars heats up, I expect BlackBerry to expand into agreements with automakers for its software as well. For these reasons, I think that this once not-hot tech stock is worth the renewed attention.
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.
View more information: https://www.fool.com/investing/2021/01/29/should-you-buy-these-3-hot-reddit-stocks-before-it/