'Fighting 100 mini Mike Tysons': The powerful influence of Reddit trade

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Over the past few weeks the market has been treated to some fireworks thanks to Reddit’s r/wallstreetbets forum.

A few stocks have “mooned,” the internet term for a big surge. Among them: Video game retailer GameStop (GME) is up 750% year-to-date, BlackBerry (BB) 179%, mall retailer Express (EXPR) 346%, real estate investment trust Mac (MAC) 98%, and Nokia (NOK) 25%.

These stocks have been discussed and promoted on the popular Reddit message board, which started stirring up the investing world late last year with irreverent meme-based style. Throughout the pandemic, the rise of a new generation of daytraders, often trading for free on Robinhood, would exert enough force as a group to make wild things happen to stocks, like spike shares of bankrupt car-rental company Hertz (HTZ).

Here are this month’s gains:

In some cases, the stocks that have popped have done so because of a short squeeze.

“This is not really a new thing, just a turbocharged version of the classic short squeeze,” said hedge fund veteran and DataTrek Research co-founder Nicholas Colas. “We saw it with [Carl] Icahn and [Bill] Ackman on Herbalife, and it’s a game hedge funds have played amongst themselves for decades.”

Now, “retail has the power of the internet to crowdsource a squeeze, and they're clearly learning how to do it now as well,” Colas said.

Hedge funds, such as Melvin Capital and Citron Research, have been betting GameStop shares would go down, and these retail investors have popularized the stock enough so that the price is rising, putting a “squeeze” on those who sold the stock short. If a short seller is squeezed, they might have to go out and buy the stock — at a loss — to cover their potential losses, which can be astronomical.

January’s crop of stocks with big pops also include NIO (NIO), AMC Entertainment (AMC), and Robinhood favorite Plug Power (PLUG). One of the things these retail investors seem to love is anything with the potential for big gains — often high-volatility stocks or cryptocurrency. (The current speculative environment is best summed up by my colleague’s tweet Tuesday at 4 p.m.: “CASINO CLOSED.”)

[Read more: GameStop phenomena is about 'the poor vs rich': Reddit WSB user]

Also on Jan. 26, the investor behind the GameStop trade on r/wallstreetbets posted a screenshot of his portfolio that went viral — it showed he had turned his position from around $50,000 to more than $22 million. These sorts of successes and articles (like this one, even) will likely convince others to try their hand at speculative short-term mega gains.

‘What’s working right now’

“There is always an attraction to ‘what’s working right now’ in capital markets, and this usually grows as investor confidence increases,” said Colas.

A lot of people have been convinced by the r/wallstreetbets forum member’s thesis and jumped on the train, creating an interesting leader-less phenomenon that, at least in this bull phase, is operating like a pack.

SOUTH PORTLAND, ME - NOVEMBER 27: Beck Carrier, second from left in American Flag sweatshirt, and Anthony Valley, third from left, both 18 from Gorham, wait with a handful of their friends outside of Game Stop on Friday, November 27, 2020. The teens have been outside waiting since Wednesday night in hopes of getting their hands on the only two new PlayStation 5s the store had in-stock. (Staff photo by Brianna Soukup/Portland Press Herald via Getty Images)
GameStop store in South Portland, Maine, November 27, 2020. (Staff photo by Brianna Soukup/Portland Press Herald via Getty Images)

“We also have to remember that 20,000 day traders working in a wolf pack don’t need a lot of individual capital to create a squeeze,” said Colas. “It’s like the joke about fighting one Mike Tyson or 100 little versions of him. In this case, it’s easier to fight one normal sized human.”

In GameStop’s case, much of the bull case comes from a value-investing play. But a lot of these speculative bets scoff at fundamentals as they short squeeze or try to pump a stock. For companies, however, it might present an opportunity.

“This can be a game-changer if these companies take advantage of the squeeze to do a spot secondary offering,” Colas said. (A secondary offering is when a company decides to raise money by issuing and selling more stock.) “Tesla was smart about this on their S&P add, giving hedge funds a chance to cover shorts on an equity offering in addition to adding supply in advance of the demand from indexers.”

During Hertz stock’s wild surge, the company sought to issue new stock to satisfy the curious high demand, but it didn’t work. But for a company with troubles but not bankruptcy?

Colas said these companies “might (and in some cases should) consider an equity offering to both take advantage of the spike and also reset their equity story among actual long-term investors.”

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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