Wall Street and C-Suite grapple with a new normal in memes stock
As the first half of 2021 draws to a close, it’s clear that the mania surrounding so-called memes stocks isn’t going away anytime soon. On the contrary, its influence in the market is evolving and presenting challenges for both business leaders and investors.
For business executives receiving the Reddit pump treatment, decisions need to be made as to whether to capitalize on the phenomenon with stock offerings like AMC Entertainment Holdings Inc. has done. Falling fundamentals, the dilemma on Wall Street is how to navigate an environment in which the fine line between speculation and investing has been erased.
“We’re in a place where it’s clear that people don’t know the difference,” said David Trainer, CEO of investment research firm New Constructs. “It’s upside down. The problem is, it can work in the short term depending on that crowd mentality. And a lot of people really don’t understand the risk.”
One indicator of stocks even as a group is an index of 37 companies whose savage volatility forced Robinhood to impose trading restrictions on them in January. The group rose more than 10 percent in the second quarter after jumping 72 percent in the first.
Headlines in the second quarter were dominated by a boom in the AMC movie chain which hit over 600% at its peak, as well as gains for original meme stock, GameStop Corp. Yet the past three months have also shown how the “diamond hands” loyalty of some novice retail traders does not always apply. A splash of stocks only increased to quickly turn into a crater, with individual investors often remaining in possession of the bag.
Some companies quickly took advantage of the rapid rise in their stock prices to raise funds by selling additional stocks. AMC is the best example of a company that not only embraced the retail crowd – CEO Adam Aron was a cheerleader for the action cult – but also raised capital from the frenzy.
The once-left-for-dead movie chain raised $ 1.25 billion in the second quarter alone, giving it another chance to improve its business despite issues that set off red flags for some investors even before the coronavirus does not close cinemas.
As for GameStop, this title has struggled to return to its intraday high of US $ 483 since late January. Yet the company’s current market value of $ 16.1 billion shows that the retail crowd is capable of radically transforming the fate of a business. GameStop has capitalized by raising around US $ 1.7 billion from the sale of shares in the past few months. But he also used those funds to write off all of his long-term debt in the hopes of a model focused on e-commerce.
For every AMC Entertainment or GameStop capable of profiting from high stock prices, there are a handful of companies like Clover Health Investments Corp. and Wendy’s Co., whose stock prices have not remained high enough to tap the market for additional capital.
The lack of stability in these movements also serves as a red flag for veterans who lived through the dot-com bubble and the 2008 financial crisis. It is a scenario that many business leaders prefer to avoid.
“If you are a business and trying to run a business, you don’t want your stock price to soar all over the place, because that isn’t a particularly good investment case for attracting new shareholders,” he said. said Michael Hewson. , Market Analyst at CMC Markets UK.
As the calendar moves into the third quarter, what lurks among the tall grass in the country of memes stocks is one to guess.
However, the rise of retail traders is unlikely to fade despite reopening of economies in the wake of the pandemic, according to a report by investment adviser Betterment LLC. The advisor found that 58% of 1,500 traders surveyed planned to trade even more as pandemic restrictions were lifted. A Jefferies survey of around 500 people found similar results and confirmed the bank’s view that retail will remain high.
“I don’t think it’s something that’s going to go away, but the threshold of boredom for some of these traders will make it harder to see where it goes next,” Hewson said over the phone.