For the past 15 months, investors have enjoyed a historic bounce-back rally on Wall Street. Since the widely followed S&P 500 hit its pandemic low on March 23, 2020, it’s surged by as much as 88%. To put this figure into context, the very long-term average annual total return (including dividends) for the stock market is about 7%.
But for some retail investors, these gains would represent peanuts.
Beginning in January, retail investors on Reddit and a handful of other social media platform began piling into stocks that were heavily short-sold by institutional investors and/or had very small floats (the amount of tradable shares). By purchasing shares and call options in these stocks, retail investors were able to effect short squeezes, leading to skyrocketing share prices.
Though many of these meme stocks — companies that have been lauded for their popularity on social media, rather than their operating performance — have given back most of their early year gains, three stand out for making a lot of retail traders millionaires in 2021.
GameStop: Up 1,187% year to date
Perhaps it’s only fitting that the meme stock which started it all makes the list: video game and accessories retailer GameStop (NYSE:GME). With GameStop up 1,187% since the year began, through May 26, it would have taken a roughly $78,000 investment into GameStop on Dec. 31, 2020 to hit millionaire status today.
When Reddit retail investors flocked to GameStop back in mid-January, it was because the company had the highest short interest, relative to float, of any publicly traded company. This, along with a short ratio (also known as “days to cover”) of around 6 made it the perfect candidate for a short squeeze. In a matter of days, GameStop’s stock catapulted from around $20 to nearly $500.
Yet, whereas most meme stocks have fallen out of favor, GameStop remains a favorite among young investors.
Fundamentally speaking, there have been positives to latch onto. For example, GameStop grew its e-commerce sales by a healthy 191% last year, including a better-than-quadrupling in e-commerce sales during the always-important holiday season. GameStop also raised $551 million in gross proceeds from a recent share offering that’ll wipe clean its remaining debt and give the company more than enough capital to continue with its digital transformation.
Then again, sales for GameStop declined more than 21% in 2020, even with the aforementioned 191% boost in e-commerce revenue. The company closed 12% of its physical stores and comparable-store sales of those that remained open declined 9.5%. The plain truth is that GameStop waited far too long to shift away from brick-and-mortar and toward digital gaming. As a result, sales are going to be stagnant for years as the company closes underperforming stores to reduce its operating expenses.
Takung Art: Up 1,205% year to date
Shares of Hong Kong-based Takung Art (NYSEMKT:TKAT) did rise in January and February, but they didn’t really catch fire with retail investors on Reddit and other social media platforms until mid-March. As of May 26, Takung was the top-performing stock on a year-to-date basis, with gains of 1,205%. A roughly $76,600 investment in Takung Art on Dec. 31, 2020 would have made you a millionaire today.
Whereas GameStop attracted retail investors due to its high short interest, Takung was valued more for its low float. When less shares are available to be traded, it can make it easier, with ample liquidity and interest, for traders to wildly push a company’s share price up or down. With only 9.3 million shares in its float, Takung was taken for a ride by momentum chasers.
The “why?” part of this share-price surge has to do with speculation regarding Takung’s interest in non-fungible tokens, or NFTs. An NFT a digital certificate of ownership found on blockchain for digital assets. Since blockchain is both transparent and immutable, it shows clear ownership of digital assets. Takung operates an online platform that allows artists and art dealers to trade and sell pieces of artwork. In theory, it wouldn’t be all that difficult for Takung to include NFTs on its platform.
The issue is that Takung Art hasn’t said anything about including NFTs on its platform — Reddit investors are merely hyping the idea up in chatrooms.
Furthermore, Takung’s operating model has been in decline for years. According to income statements, the company failed to produce $4.6 million in sales last year, even with people stuck in their homes and turning online for a significant portion of their purchases. For comparison, the company brought in more than $4.6 million in revenue in a single quarter back in late 2016. In short, this rally doesn’t have any substance.
AMC Entertainment: Up 823% year to date
Lastly, movie theater chain AMC Entertainment (NYSE:AMC) has made its fair share of millionaires in 2021. With gains of 823% since the year began, an investment of $108,400 on Dec. 31, 2020 in AMC is what it would have taken to make you a millionaire as of May 26.
Meme stock AMC was piled into by Reddit traders for essentially the same reasons as GameStop. It had a higher level of short interest and the recipe for a short squeeze in late January was just right. It’s worth noting that AMC was mere days from bankruptcy in January before raising the necessary capital to keep the lights on via share offerings and debt issuances. This forced pessimists betting on a quick bankruptcy to scurry for the exit at once.
But unlike GameStop and most other meme stocks, AMC’s balance sheet is a train wreck. This is to say that other meme stocks have been able to raise significant capital during these rallies, and they’re now sitting on healthy net cash positions. AMC raised nearly all of its capital under less-than-ideal circumstances and has well over $4 billion in net debt that it probably doesn’t have a chance of paying back when it comes due in five years (or less). During the first quarter, the company’s net interest expenses on corporate borrowings more than doubled from the year-ago quarter.
And it’s not just debt that’s worrisome. AMC had $473 million in deferred rent obligations, as of the end of March. The company’s 10Q plainly states that, even if business returns to pre-coronavirus levels, it’s going to need additional concessions from its landlords and lenders. Translation: Rental costs are going way up in 2021 (and beyond).
There’s a mile-long list of reasons why AMC is one of the worst stocks to own right now, and then there’s the single metric that retail investors are focused on: short interest. The gamblers are winning for now, but investors will almost certainly give AMC’s share price a big haircut over the long run.
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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