If you thought a new year meant leaving last year’s volatility at the door, think again. For more than two weeks, we have seen a violent fight between retail investors and the big money on Wall Street.
More specifically, the WallStreetBets chat room on the Reddit community sharing platform has apparently seen millions of retail investors flock to buy shares and out-of-the-money stock options – that is, companies where pessimists are betting significant disadvantage. This communal buying activity soared the stock prices of a few dozen shares, leading to an epic sales squeeze in some cases.
But, as you can imagine, these parabolic moves for some stocks are not pleasing Wall Street investment banks. Based on analysts’ one-year consensus price targets, the following three Reddit shares could fall from 75% to 94%.
Image source: Getty Images.
GameStop: 94% implicit disadvantage
It is probably no surprise that the Reddit-rally action on which Wall Street appears to be most negative is the poster boy for short squeeze – multi-channel video game and accessory retailer GameStop (NYSE: GME). Even after accounting for the $ 100 drop in share prices on Monday, February 1, GameStop would need to lose an additional 94% just to reach Wall Street’s one-year consensus price target of just over $ 13 .
While GameStop’s 1.625% gain in January was partially due to a slight compression – GameStop was the best-selling stock in mid-January – most of its earnings in recent weeks appear to be the result of day trading and potential manipulation of stock prices. I can say this with a relatively high level of confidence, because more than 16 times the company’s float was traded in six sessions between January 22nd and 29th. This is ample liquidity for short sellers to exit their positions, if they have chosen to do so.
The biggest problem with GameStop is that it was too late for the party to adjust its operating model. With games moving into the digital realm, the brick-and-mortar-dependent GameStop was left out, looking inward.
If there are positive points to be drawn from GameStop’s third quarter operating results and the year-end sales update, it is that e-commerce sales are explosively higher and the company continues to close stores to reduce its expenses. However, GameStop has had three consecutive years of losses and its year-round sales continue to plummet. The company could consider offering shares to bolster its balance sheet, but even so there is no guarantee that it will survive in the long run.
Image source: Getty Images.
AMC Entertainment: 82% implicit disadvantage
Another prominent Reddit action that Wall Street doesn’t like much is the cinema network operator AMC Entertainment (NYSE: AMC). AMC made a 525% gain last month and made a tiny gain on Monday, February 1st. But the company’s $ 13.30 share price would need to drop 82% just to reach Wall Street’s one-year consensus price target of $ 2.44.
Perhaps the craziest thing about the change at AMC is that it started a few days after the company narrowly avoided filing for bankruptcy. On January 25, the company announced that it had raised $ 917 million in new capital after a combination of debt and equity issues. This included the sale of 164.7 million shares, which undoubtedly has the potential to dilute existing shareholders.
The point is that AMC is not over. The cinema chain is considering issuing even more shares to take advantage of the parabolic movement in its shares in the past two weeks. If AMC issues more shares, the price is expected to be considerably lower than Monday’s close at $ 13.30.
However, an even bigger problem is that AMC Entertainment’s business model appears to be knocking on death’s door. The coronavirus pandemic has temporarily closed AMC’s cinemas or significantly reduced pedestrian traffic in its locations, and we don’t know when life will return to normal. Vaccine delivery is underway, but there have been a number of obstacles that delay the administration of these vaccines. It is also unclear how a considerable section of the population that chooses not to be vaccinated will affect the reopening plans.
In addition, the pandemic allowed large content and streaming companies the opportunity to show what life would be like without the cinema experience. For example, HBO Max debuted Wonder Woman 1984 the same day, it opened in theaters. If new releases were broadcast regularly, it would be a major disruption to the AMC operating model.
Image source: Getty Images.
Sundial producers: 75% implicit disadvantage
The Reddit operation also set its sights on Canadian marijuana stock Sundial Growers (NASDAQ: SNDL). The company’s shares doubled in three trading sessions between January 27 and February 1, with around 4.9 billion shares – yes, with a “b” – changing hands. However, if Wall Street’s one-year target price proves to be accurate, Sundial could lose 75% of its value.
Similar to GameStop and AMC, the large number of shares being traded daily here shows that we are well beyond the point of a short squeeze. But retail investors love low-cost stocks, and Sundial has found itself below the $ 1 per share mark for six consecutive months, closing on February 1 at $ 1.21 per share. As a reminder, Sundial is in danger of being removed from the Nasdaq exchanges for not maintaining the average share price of $ 1, and may be forced to enact a reverse split in the near future. Reverse divisions are generally perceived as a sign of weakness by Wall Street and investors.
But the biggest blow to Sundial has nothing to do with a penny or potential share price for a reverse split. Instead, the company has been issuing shares and converting debt into equity at a surprising pace to improve its balance sheet. In fact, the company announced a $ 100 million share offer last week. In recent quarters, Sundial’s pending share count has skyrocketed, which is usually very bad news for shareholders.
Another problem is that Sundial is in the middle of an operational transition. After previously focusing on low-margin wholesale cannabis, the company is now betting everything on the retail equation. Although I don’t disagree with this business decision, it led to some really ugly year-over-year and quarter-to-quarter sales comparisons. It probably also guarantees that the Sundial will not be profitable anytime soon.
Even though Wall Street may be wrong, these price targets accurately reflect the concerns faced by all three bullish shares on Reddit.