On Wednesday morning, AMC Entertainment shares increased by more than 200 percent during premarket trading and hit more than $15 per share, nearly seven times the average analyst price target.
AMC joins GameStop, BlackBerry, Bed Bath & Beyond, Etsy and a list of heavily shorted stocks that have recently seen eye-opening gains thanks to encouragement from individual investors on Reddit’s WallStreetBets. Hedge funds that are short on the other side have been rushing to cover their losses.
The shares more than quadrupled at the open before confronting several trading halts. They were up 204% as of 1 p.m. in New York after earlier reaching the highest level since October 2018. Volume was more than 16 times above the three-month average.
The stock joins a flood of consumer-facing shares like GameStop Corp. posting triple-digit gains this week as Reddit-fueled retail traders drive up prices, testing the mettle of short sellers. AMC’s ability to raise any additional funds at the current share price could help it navigate a liquidity crunch, said Bloomberg Intelligence analyst Amine Bensaid.
A quick rundown of the GameStop fiasco and how it’s related to AMC
- $GME was first pitched as an investment on r/WallStreetBets almost two years ago but has built up steam over the past year.
- Members of r/WallStreetBets believed that the struggling GameStop could turn around its fortunes by going digital.
- Ryan Cohen, the founder of Chewy, bought up a position in $GME with plans to modernize the company.
- Since then, a number of prominent hedge funds such as Citron and Melvin Capital revealed they were short selling $GME.
Though the buying frenzy around GameStop hit this month, this one has been in the making for a while. Brandon Kochkodin at Bloomberg recently laid out how GameStop, which isn’t expected to even turn a profit until 2023, has seen its market skyrocket, and what Reddit has to do with it. By Kochkodin’s recounting, a bull case for GameStop (basically, an argument that its stock is good) started showing up on WallStreetBets about two years ago and has, off and on, been bubbling up.
GameStop’s stock price has skyrocketed from where it was at the start of the year, at under $20, to about $148 at market close on Tuesday. It’s been super volatile, thanks in no small part to Redditors and the short sellers they went after. WallStreetBets has an antagonistic relationship with shorts — many retail traders are betting stocks will go up, not down.
The stock is up more than 250 percent year to date, rising sharply last week after GameStop announced Chewy CEO Ryan Cohen was joining its board, CNBC reported. Short-seller Citron Research predicted the price would drop, but members of the Reddit board r/wallstreetbets, who had been generating interest in the stock, criticized Citron on the Reddit message board and continued praising the stock on social media.
Last week, Citron announced on Twitter that it would be hosting a livestream event laying out the short case against GameStop and arguing people buying the stock were ‘suckers at this poker game.’ Eventually, they got the video out and the battle has continued. Left has said he’ll no longer comment on GameStop because of the “angry mob” that’s formed against him and complained he’d “never seen such an exchange of ideas of people so angry about someone joining the other side of the trade.”
“Hedge funds are getting their asses kicked by the retail investor,” Lindzon said. He noted that millennial investors have been sharing information across Reddit and social networks for years, but the sheer number of them now means they are a force to be reckoned with. ‘It’s like the velociraptors in Jurassic Park; they get smarter, and eventually they hop the fence,’ he said.
Some investors, known as shorts, essentially bet that a company’s stock will fall. These investors borrow stock from other investors and sell it — with plans to buy it back when the prices fall and then return it to the original owner.
If a stock suddenly spikes higher, short sellers may have to rush en masse to buy back shares or risk losing their shirts. The more that a shorted stock goes up, the bigger the losses become if a short seller doesn’t buy back (or cover) their position. That creates the squeeze.
The shorts are definitely hurting: Melvin Capital Management, a hedge fund betting against GameStop, was down 15 percent in just the first three weeks of 2021, according to the Wall Street Journal. It’s had to call in some help and finally closed out its position altogether.