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How AMC and GameStop became Reddit favorites

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 the darlings of the Reddit crowd.

So why do some stocks go from being unloved on Wall Street to being stalwart favorites of the Reddit military?

What all of these stocks have in common is that a good number of short sellers bet against them.

And it pisses the passions of the Reddit crowd, many of whom consider short selling – when an investor borrows a stock and sells it in the hopes of buying it back at a lower price and pocketing the difference as profit – like a rigged piece of the investment game designed for the benefit of fat cat hedge funds.

The Reddit team is looking for Outsiders that Wall Street pros think are relics: Blackberry (BB) and Nokia (NOK) was left behind when everyone started buying iPhones and Androids, while AMC (AMC) and GameStop (GME) have both been hit hard by the pandemic, as well as changes in the way people watch movies and play video games.
“The shorts have a few tricks for us today. But today we put them on,” a Redditor wrote Thursday of AMC, GameStop and Tilray (TLRY), a cannabis company that is also heavily bypassed. “We are fighting against the shorts. We are staying strong. Monday we will be in orbit and in full control.”

“Root out” the life of hedge funds

The term “meme stock” can sometimes be used derogatoryly, but the point is that investors on Reddit are sophisticated enough to realize that by targeting stocks that are heavily shorted and do not have a significant amount of money. ‘stocks available for trading, there is a chance to help fuel what is called a short squeeze.

A tightening occurs when short sellers have to rush to buy back the stocks they have borrowed because the price goes up.

The higher a stock is, the more money the short seller is likely to lose. So they often have to buy back the stock quickly to avoid losing their shirts, which pushes the price up even higher.

If a short seller borrows a stock that is trading at $ 50 and sells it, but the stock then climbs to $ 75, that’s a loss of $ 25. If it goes to $ 100, the shorts are $ 50 in the red, and so on. They want to get out quickly to cut their losses, and that creates the squeeze.

“It’s the perfect storm for an epic short squeeze: the mother of all short squeezes,” a Reddit user said of AMC on Thursday. The poster even declared that AMC was Wall Street’s “safest bet” – and highlighted it using several rocket emojis.

Of course, AMC is not a “safe” stock per se. Many things can go wrong with the reopening of the economy. And while things go well, some argue that stocks, which have already risen more than 2,000% in 2021, could eventually cool down.

Planet of the Apes’

Still, investors who bet against memes stocks should realize that so-called monkeys, a term many investors on Reddit use to describe themselves, play the long game. They aren’t necessarily looking to always cash out after winning. quick money.
“We’re here for the long haul,” a Reddit user said in an article on GameStop, BlackBerry, AMC and ContextLogic, adding that the actions are “absolutely ready for a squeeze.”

Reddit’s crowd support is also drawing the attention of memes action management teams.

Clover Health CEO Vivek Garipalli thanked them during the company’s earnings call with analysts last month: “We’re also including a few questions from Clover’s strong investor community on Reddit. By the way, we strongly believe in the retail investor. community.”
How AMC and GameStop became Reddit favorites
AMC even launched a rewards program for loyal retail investors.

“I’m quite optimistic about AMC’s new shareholder base,” AMC CEO Adam Aron said in his earnings call last month. “Go to Twitter, go to Reddit, just go to YouTube. Read what these people are writing. They love AMC.”

“These are not people who are just going to be investors in AMC. They will be AMC customers who will come to our theaters and enjoy watching movies in our theaters as paying guests,” he said. added. “So I like the idea that we have a base of passionate, engaged and enthusiastic shareholders.”

Meanwhile, not all stocks approved by Reddit are involved in a battle between retail buyers and hedge fund short sellers. Just look Wendy’s (MAGNIFYING GLASS). The Trian hedge fund, headed by Nelson Peltz, is the largest shareholder.

So it seems the key to finding a stock that’s ready for a Reddit bump is identifying companies that don’t have a lot of stocks available for trading. It’s easy to propel those stocks higher.

This was the case with Wendy’s earlier this week, as a Reddit user noted that “the frenzy + the scarcity + the low volume means small purchases could drive the price up quickly.”


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