“AMC to the Moon”: Meme Stock Frenzy Reignites

Individual traders have sent jitters through Wall Street since January when they fueled a buying spree in shares of small, often struggling companies such as GameStop Corp. and AMC. The frenzy has reignited in recent days, surprising some professional investors who had expected the impact of amateur traders on the market to wane. “AMC to the Moon” posters are popping up at street corners and pool parties in the U.S. in yet another sign of the retail frenzy over meme stocks. “AMC and meme stocks are somewhat the modern and accelerated version of tulip bulbs frenzy in the 17th century,” said Sylvain Goyon, a Paris-based strategist at Oddo BHF. “The shares rise with the hype and die without it.”

AMC shares are up 2850% this year, as of June 2nd close, bringing its market capitalization to more than $31 billion. That makes it worth more than stocks like Delta Air Lines, State Street, and Best Buy.

On June 1st, AMC announced it had sold 8.5 million shares to Mudrick Capital at a price of $27.12. The market reacted with enthusiasm as the stock ended the day ~23% higher. This was despite reports throughout the day that Mudrick had already sold the shares on the open market for a quick profit. Mudrick Capital, which specializes in distressed investing, has been a key creditor to AMC throughout the COVID-19 crisis.

On June 2nd alone, AMC soared 95% in the regular trading session to close at an all-time high of $62.55. Its previous closing record of $35.86 was reached in 2015, according to FactSet data.

Retail investors — many active on Reddit’s WallStreetBets forum — led the AMC rally, and AMC executives have taken note. The company recently announced a new portal to connect with individual investors and offered free popcorn, exclusive screenings, and other perks to those who hold its stock.

On June 3rd, AMC shares dropped more than 30% at one point following a stock sale announcement, halting the massive rally led by retail traders.

AMC said in a regulatory filing that it may offer and sell from time to time up to an aggregate of 11.55 million shares of its Class A common stock. Additional shares dilute the percentage of ownership of the company for existing shareholders.

JPMorgan noted that, in the last week, retail order flow into AMC jumped to $583 million, 6.9 standard deviations above the average level of the last one year. According to their quantitative strategy, this kind of imbalance can lead to more outperformance by the stock in coming weeks.

In a similar occurrence seen in January with meme stocks like GameStop, defiant short-sellers have increased their bets against AMC shares over the last month, possibly pushing the move higher.

In May and June of this year, AMC stock became the darling of day traders who put the squeeze on Wall Street’s big players, including hedge funds.

A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio construction, and risk management techniques in an attempt to improve performance.

As an investment strategy, short selling is widely deployed by hedge funds and other institutional investors, to varying ends.

In simple terms, short selling involves counting on a stock price dropping. Short selling generally involves selling borrowed shares of a stock with the belief that the price will drop, at which point you’d buy shares at a lower price to then repay what you borrowed.

With this strategy, the risk on the upside is unlimited. Short selling is a highly speculative strategy that comes with plenty of risks; since there’s theoretically no limit to how high a stock’s price can climb, then there’s also no cap on the losses a short seller could sustain on a bad bet. But it also serves a purpose beyond simply betting on a stock’s losses; many investors use it as a hedging tactic to offset the downside risks of their more optimistic “long” positions in the same security or sector.

Short sellers like hedge funds borrow the stock from an investment bank and sell it in the hopes of buying it back at a lower price and returning the shares, pocketing the difference. However, when a stock surges higher, a so-called short squeeze can occur where investors are forced to buy back the stock to cut their losses.

AMC’s recent leap likely was amplified by the significant amount of stock that had been sold short by investors seeking to benefit from a decline in the company’s share price. When prices start to rise, inflicting losses on short sellers, they often buy back borrowed shares they had sold, fueling further gains.

Performance in June

Amid another frenetic trading session on June 3rd, shares in BlackBerry fell 6%. They had earlier jumped over 16% and added to their 32% rally on June 2nd as individual investors put out calls online to take the price “to the moon.”

The spike in BlackBerry shares had no obvious catalyst other than appearing to be propelled by a fresh burst of interest in the stock on internet groups like Reddit’s WallStreetBets. More than 2,300 comments about the company were posted on the forum before the bell, outstripping mentions of AMC according to data from meme-stock aggregator TopStonks.com.

Comments mentioning BlackBerry shares on
Reddit's WallStreetBets forum

When GameStop’s stock took off in January, it caught a lot of people by surprise, especially institutional Wall Street investors. Why was a stock for a struggling video game retailer shooting up almost 2,000%?

The explanation at the time was that a group of people on a Reddit forum, called “WallStreetBets”, all started buying the stock at the same time.

But the forces that drove GameStop’s surge go much deeper than online chatter. The movement was driven by changing dynamics in investing, new trading technology (which one investor described as giving the keys of a Porsche to a teenager), resentment of Wall Street, and even pandemic isolation.

Free trading and simple-to-use apps have made it much easier for regular investors to pour money into stocks like AMC. In a world without international travel, live entertainment, and other usual pastimes, brokerage apps such as Robinhood are drawing hordes of new users looking for both a diversion and a jackpot.

However, there is a difference between short-term trading and long-term investing. Your clients’ portfolios should be invested with a long-term objective in mind. Get-rich-quick schemes can be deceiving.

Help ensure your clients’ portfolios are diversified and that your clients are allocating to institutional hedge funds that have robust risk management frameworks, proven track records, and deep teams to navigate market volatility arising during events such as these.