Estimated read time: 4 minutes
Publication date: 14th Jun 2021 10:29 GMT+1
Since the start of 2021, a group of retail traders on social media platform Redditt have initiated multiple short squeezes in “meme” stocks. These stocks are fundamentally weak and have a high short-interest ratio.
A short squeeze takes place when a stock experiences a significant uptick in its price. This in turn forces short-sellers to buy the stock and cover their losses. For example, if you are a trader who is bearish on a particular stock that is currently trading at $50 per share and is convinced that prices will move lower in the upcoming sessions, you will “short-sell” the stock.
It means you borrow the particular stock and sell it for $50. If the stock drops to $40, you can buy it back and pocket a profit of $10/share. However, in case the stock rises to $60, you may have to repurchase the stock at a higher price.
Now, in the past few months, short-sellers were targeted by a group of traders who could drive share prices significantly higher, leaving the former with no option but to book a loss and cover their position. This is called a short-squeeze. Here, we take a look at some of the stocks that have been part of the short squeeze mania.
Shares of the video-game retailer were trading at $4.96 per share in June 2020. It then touched a record high of $483 in January 2021 before falling to less than $40 in the next month, Currently, GME stock is trading at $310.4 and has more than doubled in the last month.
GameStop (NYSE: GME) has been severely impacted by the shift towards digital gaming. Players now can download games from gaming consoles making GME irrelevant in the supply chain. While GME is looking to pivot towards an e-commerce model, it remains a stock that is fundamentally weak and one that’s grappling with multiple issues.
Shares of theater chain AMC Entertainment (NYSE: AMC) were trading at $6 in June 2020. AMC stock then rose to $20 in January this year and touched an all-time high of $72.62 in intra-day trading this month. AMC stock is currently trading at 49 per share and is up a whopping 417% in the last month.
However, long-term investors should note that AMC remains a high-risk bet given that OTT and streaming platforms have gained massive traction amid the ongoing pandemic.
Shares of BlackBerry (NYSE: BB) were trading at $7.52 in June 2020 and touched a multi-year high of $36 in January 2021. It’s currently trading at $19.3 and is up 88% in the last month. BlackBerry lost massive ground in the smartphone segment and pivoted towards enterprise security. However, here too, the company has disappointed investors as sales were down over 30% in the last reported quarter.
A Canada-based cannabis producer- Sundial Growers (NYSE: SNDL) shares were trading at $0.2 in October 2020 and rose to $3 in February 2021. Its currently priced at $1.18 and is up 54% in the last month. SNDL stock has grossly underperformed the broader markets and is still down 90% from all-time highs.
In the first quarter of 2021, it reported a negative gross margin while its sales were down 37% year over year. Sundial is now looking to drastically reduce its product portfolio and focus on high-margin items while financing other cannabis companies and diversifying its revenue base.
Clover Health Investments (NASDAQ: CLOV) which is a Medicare Advantage insurer in the U.S. has seen its stock price rise from $7 in May 2021 to $22.15 on June 8 when it gained 85% in market value. It touched a record high of $22.15 in intra-day trading and is since down 40% at $18.73 per share. Investors are worried about the stock's high valuation metrics and its ability to compete with legacy players that are market leaders in the insurance space.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
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