‘Don’t Be That Sucker:’ Traders Warn Against Joining AMC Rally
(Bloomberg) -- The staggering surge in AMC Entertainment Holdings Inc. as a result of Reddit fans’ frenzy is making professional market participants increasingly uneasy.
After retail traders sent the shares of the unprofitable movie-theater chain to a record high, bringing this year’s advance to almost 3,000%, investors and strategists are warning that the chances of getting badly burned and losing money on this trade are now very high.
“The Reddit bandwagon will find new targets and revenge against short sellers is highly likely to continue,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said by email. “This has turned into a game, so investors who don’t have money they can afford to lose should stay clear of hot stocks. If lots of people are piling into a company, they are probably buying it at an inflated price, and as we’ve seen, rapid spikes in prices are often followed by equally rapid falls.”
On Thursday, the Reddit-fueled rally showed no signs it’s running out of steam. AMC gained 18% in premarket trading to $73.80 as of 6:11 a.m. in New York.
Here’s what market players are saying about the risks and outlook for AMC’s shares:
Joachim Klement, a strategist at Liberum:
- “By now many studies have been done on the GameStop frenzy in January and they all point to the fact that retail traders can distort prices for a short while, but they on average don’t make money with it and in fact lose money doing that.”
- “Institutional investors should ignore these meme stocks and wait until the share price has settled down. Like in every bubble, the retail investors will eventually run out of people who are willing to buy into the hype, at which point the bubble bursts and the last ones holding the bag will have to nurse their losses.”
- “AMC and other meme stocks are a case of people trying to find a sucker to buy into the hype who will take your overvalued stocks from you. Don’t be that sucker.”
James Athey, investment director at Aberdeen Asset Management:
- “It just terrifies me. To me it just shows how you know it’s the sort of extreme result of markets, which have just become so excessively manipulated and investors have almost been forced for a number of years to play the game of central banks and liquidity rather than fundamental analysis, and this is where it leaves us. What are the knock-on impacts for other asset classes? Well, at this moment in time I don’t think they are huge. They will be huge when the air inevitably comes out of some of these rather frothy valuations.”
- “People are eschewing any notion of fundamental analysis or valuation in favor of the notion that the momentum is the biggest driver, and/or business models, which are very difficult to price, or businesses which are attempting to make dramatic changes to their business model to account for the fact that the world is becoming more digital. There are investors prepared to price those corporate decisions not for perfection but for beyond perfection and it’s obviously a self-sustaining and fulfilling prophecy.”
Marija Veitmane, a senior multiasset strategist at State Street:
- “This meme mania basically tells me there is plenty of cheap money.”
- “Broader implications is what is happening with the market. The path of least resistance is for this money and cheap financing to be redeployed in financial markets or even spending and going into corporate profits.”
- “Assets get more expensive, real assets, financial assets -- that’s happening -- until interest rates start going higher substantially, we will probably have appreciation in financial markets so that’s the conclusion we draw.”
Ipek Ozkardeskaya, a senior analyst at Swissquote:
- “Fundamentally, AMC is not a flourishing business, or at least not right now, and in my opinion, there is little chance that the actual and future business environment would ever justify a $33 billion worth of market capitalization.”
- “Is the price high enough? Should we expect correction? Relatively speaking, it is. Trend and momentum indicators are flashing red, obviously. Rationally the only possible direction from here is an as-impressive downside correction.”
- “Wall Street won’t let AMC slip by so easily, as the short positions keep on coming back and the higher the price, the higher the gains on a short trade. But you still be careful with a short position, especially in such a wild market, as losses in a short trade are simply unlimited.”
Alberto Tocchio, a portfolio manager at Kairos Partners:
- “It is definitely a crazy situation, which is affecting not only markets but hedge funds in terms of pain on the short leg. The hedge fund performance pain is ramping up again similarly to what happened in January. I believe that the current abundance of liquidity and savings is creating these bubbles.”
- “I think we will need to cope with these speculations for a while and unfortunately it is an additional difficulty for hedge-fund managers in an already complex market.”
Ricardo Gil, head of asset allocation at Trea Asset Management:
- “These jumps aren’t backed by any fundamental analysis, they are cracks that open in the system because of the excess of liquidity as investors look for stocks where they know there are forced buyers such as hedge funds. The problem will be if one of these situations translates into a systemic risk.”
Keith Temperton, a trader at Forte Securities:
- “It looks like a classic speculative bubble to me.”
- “It’s the power of the Reddit brigade, which is back.”
Charles-Henry Monchau, chief financial and chief investment officer at FlowBank:
- “The world is awash with liquidity. And this leads to bubbles and extreme situations such as the one we are seeing now on these retail sentiment names. The meme stock phenomena is coming back with a vengeance after two months’ pause and this could indeed create some volatility on the overall market.”
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