Newly infamous Reddit chatroom r/WallStreetBets has taken the financial world by storm.
The group of determined traders on that subreddit recently launched GameStop (NYSE:GME) from $17 to $483 in mere days. They pushed Bed Bath & Beyond (NASDAQ:BBBY) from $17.50 to $53.90. Even AMC Entertainment (NYSE:AMC) exploded from $2.18 to a high of $20.36. All after squeezing billions of dollars from short positions.
In fact, as of January 25, short sellers had lost $3.3 billion and climbing.
Along the way, the squeeze even crushed top hedge funds, such as Melvin Capital, which lost 53% in January. According to Reuters, Melvin ended the month with $8 billion in assets after starting the month with about $12.5 billion.
However, this may not be the end of such rallies. Over the past few weeks, WallStreetBets has gone from having about a million followers to 7.9 million. While an audience of that size can have a substantial impact on stocks, like GME, BBBY and AMC, you have to be cautious.
Here are 5 top Reddit stocks to sell after the short squeeze:
- GameStop (NYSE:GME)
- Bed Bath & Beyond (NASDAQ:BBBY)
- AMC Entertainment (NYSE:AMC)
- Koss (NASDAQ:KOSS)
- Express (NYSE:EXPR)
Carefree speculators are jumping all over these so-called “meme stocks,” thinking the rallies won’t end. But you know as well as we do, it will end. It won’t be pretty if you’re left holding the bag.
Reddit Stocks To Sell After The Squeeze: GameStop (GME)
GameStop exploded from $17 to $483 within days. Not only is this stock technically overvalued, it’s fundamentally overvalued.
At the moment, struggling GME has a market cap of $17.27 billion at 68x book. Remember this is a brick and mortar store that just saw its net sales fall 3% year over year thanks to an 11% decrease in the company’s store base.
With GME, you’re simply buying blind momentum over nothing more than a lot of hot air.
Bed Bath & Beyond (BBBY)
Bed Bath & Beyond ran from a low of about $17.50 to $53.90 on a pump as well. However it’s now falling apart, last trading at $29.96. From here, I wouldn’t be shocked to see it fall back to $17.50 from severely overbought conditions.
Analysts argue BBBY shares exceed fair value. KeyBanc Capital Markets’ Bradley Thomas downgraded the stock to “Underweight” from “Equal Weight” with a target of $24.
Earnings really aren’t much to write home about either. Fiscal third quarter sales were down 5% year over year, with net sales down 18% to date.
AMC Entertainment (AMC)
AMC rocketed from less than $2 to a high of $20.36 in days on a squeeze.
While it could see more short covering, it could fall apart at any time. Remember, AMC is still struggling with the pandemic. Third quarter revenue just fell 91% to $120 million with a collapse in movie ticket sales. Management has expressed doubt with the company.
Yet traders are lining up around the block to buy this stock? And all because of some chatroom-fueled short covering.
Worse, MKM Partners’ Eric Handler just downgraded the stock from a “neutral” rating to “sell.” He also cut the price target from $2 to $1, noting that AMC’s share price and valuation have decoupled.
“Near-term prospects of bankruptcy have been avoided thanks to $1.2bn of fresh capital being raised since mid-December. However, equity shareholders have been diluted by roughly 75% over the last couple months and there is still approximately $5.7bn of debt, a total which is growing each quarter due to deferred interest payments which are tacked on to the principal balance.”
KOSS ran from $2.50 to a high of $127.45. It’s also starting to pivot lower from overbought conditions when looking at RSI, MACD and Williams’ %R.
KOSS stock was also higher after the company posted strong sales growth and profit in its second quarter earnings release. Revenue came in at $4.9 million from $4.2 million year over year. Net income was $509,000 from $216,000 year over year.
While KOSS has a lot going for it, it’s up too high, too fast. At the moment, it’s a $487 million company with a trailing P/E ratio of 640. Wait for KOSS to come back to earth before buying.
Express is also pivoting lower from overbought conditions after running from $1 to about $14. Wedbush analyst Jen Redding is cautious on the stock and valuation after the latest rally, saying the company is:
“… burning upwards of $134.5 million in nine months as the pandemic drives demand for more casual work-at-home apparel, hitting gross margin and comp at the traditionally dressier apparel retailer particularly hard.”
In addition, earnings haven’t been great at all. The company forecast weaker than expected fourth quarter results with margins expected to miss consensus. Redding forecasts gross margins of 11.4%, which is below the expected 17.78%.
Ignore the traders lined up to buy this one, too. There’s nothing beyond hype to believe in.
On the date of publication, Ian Cooper did not have (either directly or indirectly) any positions in the securities mentioned in this article. A contributor to InvestorPlace.com, Ian Cooper has been analyzing stocks and options for web-based advisories since 1999.