Fund manager says meme stock phenomenon is not a fad

New York (CNN Business)You’ve probably heard of the FAANG stocks: Facebook, Amazon, Apple, Netflix and Google owner Alphabet. But it’s the BANG stocks of Reddit WallStreetBets meme fame that are now taking the investing world by storm.

BlackBerry. AMC. Nokia. GameStop. This quartet, along with others such as insurance startup Clover Health, mobile shopping app developer ContextLogic and fast food chain Wendy’s, have become darlings of the Reddit crowd.
So why do some stocks go from being unloved on Wall Street to diehard favorites of the Reddit army?

What all these stocks have in common is that a fair number of short sellers are betting against them.

And that riles the passions of the Reddit crowd, many of whom view short-selling -— when an investor borrows a stock and sells it with hopes of buying it back at a lower price and pocketing the difference as a profit — as a rigged part of the investing game designed to benefit fat cat hedge funds.

The Reddit crew is looking for underdogs that Wall Street pros think are relics: BlackBerry (BB) and Nokia (NOK) got left behind when everybody started buying iPhones and Androids, while AMC (AMC) and GameStop (GME) have both been hit hard by the pandemic, plus shifts in how people watch movies and play video games.
“Shorts have some tricks for us today. But today we set it up,” wrote one Redditor on Thursday about AMC, GameStop and Tilray (TLRY), a cannabis company that is also heavily shorted. “We battle the shorts. We stay strong; Monday we’ll be in orbit and complete control.”

‘Squeezing’ the life out of hedge funds

The term “meme stock” may sometimes be used pejoratively, but the fact is Reddit investors are sophisticated enough to realize that by targeting stocks that are heavily shorted and don’t have a sizable amount of shares available for trading, there’s a chance to help fuel what’s known as a short squeeze.
A squeeze takes place when short-sellers have to rush to repurchase shares they borrowed because the price is rising.
The higher a shorted stock goes, the more money the short-seller stands to lose. So they have to often quickly buy the stock back to avoid losing their shirts — thus pushing the price even higher.

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If a short-seller borrows a stock trading at $50 and sells it but the stock then climbs to $75, that’s a $25 loss. If it goes to $100, the short is $50 in the red, and so on. They want to get out quickly to reduce their losses, and that creates the squeeze.
“This is the perfect storm for an epic short squeeze: the mother of all short squeezes,” said one Reddit user about AMC on Thursday. The poster even went on to declare that AMC is the “safest bet” on Wall Street — and emphasized that by using several rocket emojis.
Of course, AMC is not a “safe” stock per se. A lot can go wrong with the reopening of the economy. And even if things go smoothly, some argue the shares, which are now up more than 2,000% already in 2021, could eventually cool off.

Planet of the ‘apes’

Still, investors who bet against the meme stocks need to realize that the so-called apes, a term that many investors on Reddit use to describe themselves, are playing the long game. They are not necessarily looking to always cash in after making a quick buck.
“We are in this for the long haul,” said one Reddit user in a post about GameStop, BlackBerry, AMC and ContextLogic, adding that the stocks are “absolutely primed for a squeeze.”
The support of the Reddit crowd is grabbing attention from the meme stocks’ management teams, too.
Clover Health CEO Vivek Garipalli gave them a shoutout on the company’s earnings call with analysts last month: “We are also including some questions from the strong community of Clover investors on Reddit. As a quick aside, we are a big believer in the retail investor community.”

AMC has even launched a rewards program for loyal retail investors.
“I’m quite optimistic about the new shareholder base of AMC,” said AMC CEO Adam Aron on its earnings call last month. “Just go on Twitter, just go on Reddit, just go on YouTube. Read what these people write. They love AMC.”
“These are not people who are just going to be investors in AMC. These are going to be customers of AMC who come to our theaters and enjoy watching movies at our theaters as paying guests,” he added. “So I love the idea that we have a passionate, committed, enthusiastic shareholder base.”
Meanwhile, not all Reddit-approved stocks are wrapped up in a battle between retail investor longs and hedge fund short sellers. Just look at Wendy’s (WEN). Hedge fund Trian, run by Nelson Peltz, is the top shareholder.

So it seems the key to finding a stock primed for a Reddit bump is to identify companies that don’t have a lot of shares available for trading. It’s easy to propel those stocks higher.
That was the case with Wendy’s earlier this week, as one Reddit user noted that “frenzy+scarcity+low volume means minimal buys could push the price quickly.”
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