Legendary investors like Warren Buffet and Peter Lynch believe in looking at positive fundamentals when finding stocks to buy. The belief is that earnings will eventually be reflected in the stock price — at least when looking at the long-term. For the most part, the strategy has worked quite well.
But there are a growing number of investors — who share their ideas on online platforms like Reddit — who take a radically different approach. The fundamentals may not be a consideration at all. Instead, the strategy may involve sophisticated strategies to unlock inefficiencies in the market.
We’ve seen this in a big way in 2021, with huge bullish moves in what may be considered by many to be “ridiculous stocks.” The approach has been to look at companies with high levels of short positions. Thus, with aggressive buying, this can trigger a fierce short squeeze, which propels the stock price even higher. The reason for this is that short sellers have to buy back stock to close out their short positions.
Yet short squeezes are temporary. In fact, many of the Reddit stocks have seen major drops during the past week.
So what are some of these companies, and what are the fundamentals? Let’s take a look:
- GameStop (NYSE:GME)
- AMC Entertainment (NYSE:AMC)
- Koss (NASDAQ:KOSS)
- Bed Bath & Beyond (NASDAQ:BBBY)
- Express (NYSE:EXPR)
- BlackBerry (NYSE:BB)
- Nokia (NYSE:NOK)
Stocks to Buy (According to Reddit): GameStop (GME)
The origins of GameStop go back to the mid-1980s. At the time, the company was called Babbage’s and the founders included two Harvard Business School graduates. They even got the financial backing of billionaire tech tycoon, Ross Perot.
But of course, the environment is much different for GameStop today. Over the years, there has been a trend toward online delivery of games. There has also been a decline in traffic, which the novel coronavirus pandemic helped accelerate.
GameStop has recognized these headwinds and has tried to implement digital strategies to get things back on track. But this has proven extremely difficult. For the nine weeks ending January 2, 2021, sales dropped 3.1% to $1.77 billion.
This is not to imply that things are hopeless. Chewy (NYSE:CHWY) co-founder Ryan Cohen recently took a 12% equity stake in GME stock (through his fund, RC Ventures) and he definitely has the right tech chops. Yet a turnaround will likely take a few years to show results, as the retail operations will likely be an ongoing drag on results.
Since early 2017, AMC stock has been mostly in a downward trend. The shares would go from $33 to a low of $2. Of course, with the Reddit frenzy, there was a sudden major bull move in January. AMC stock would exceed $13.
But regardless, the fundamentals for AMC remain challenging. The Covid-19 pandemic has meant the business has been mostly shutdown. In the latest quarter, revenues plunged 91% to $120 million.
True, as things improve with the rollout of the vaccines, business will rebound. But it may not necessarily get back to previous levels for some time. The reason is that the mega media companies have been investing heavily in streaming services, such as Disney (NYSE:DIS). Oh, and AT&T’s (NYSE:T) WarnerMedia business will release its new films in theaters and on its online platform simultaneously. In other words, the pandemic may have a long-term impact on entertainment habits.
With AMC stock price rising, the company has been able to raise $1.2 billion. This will be essential in keeping the operation solvent. But the company also has taken on a large amount of debt ($5.7 billion). So going forward, there will be significant interest payments, which will weigh on the bottom line.
KOSS, which sells stereo headphones and other accessories, did not get much attention on Wall Street during the past five years or so. The stock traded mostly between $1.50 to $2.00. But early this year, it became the stock to buy with Reddit investors. KOSS stock would soar to a staggering $127.
Unfortunately, the bubble has deflated greatly. KOSS stock is now at $19.
Note that the company is fairly small. In the latest quarter, sales came to $4.9 million, up about 18.4% on a year-over-year basis. There was strength with U.S. and European distributors as well as direct-to-consumer business. Hey, with many people staying at home, there has been robust demand for the company’s product.
However, the valuation remains at lofty levels. Consider that the shares are trading at 25 times revenues.
Bed Bath & Beyond (BBBY)
Among the stocks to buy for the Reddit community, Bed Bath & Beyond hasn’t had a stratospheric surge. But the gain has still been notable. From early January, BBBY stock went from $18 to a high of $53. That last time it was at these levels was back in 2015.
But as of now, the price is at much more reasonable levels: $26. The market capitalization is $3.2 billion.
What about the underlying business? It has actually been showing some improvement. For example, the company has reported two consecutive quarters of positive comparable sales growth. There has also been continued strength with the digital business. There was a 94% spike in the main Bed Bath & Beyond banner and a 2 million increase in new online customers.
According to CEO Mark Tritton, on the earnings call: “We have many bold and exciting plans for fiscal 2021, such as launching new own brands that will help differentiate us in our key destination category, remodeling approximately 150 stores under our store network optimization program, introducing new and unique digital services designed to enhance our omni-always experience, modernizing our technology and operations and reinventing our supply chain for the future, investing to further strengthen our Buy Buy Baby and Harmon banners, and continuing to unlock and deliver shareholder value.”
In late September, the New York Stock Exchange notified Express that the company was not in compliance with it listing requirements. The reason was because the average closing price of EXPR stock was less than $1 per share for over 30 consecutive trading days.
But of course, investors of Reddit have quickly resolved this. Yes, the company is back in compliance. The current stock price is $3.2 and the high was $14.
However, the company continues to struggle in the tough retail environment. In the most recent quarter, the net sales plunged by 34% to $322.1 million and comparable store sales were off by 30%. As for the net loss, it was $90.3 million or $1.39 per share.
Wall Street is no fan of EXPR stock either. The average price target is $1.42, which assumes 56% downside from current levels.
BlackBerry was the innovator of the smartphone market. But this business imploded because the company failed to adapt to the onslaught from Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
As a result, BlackBerry had little choice but to transform itself — that is, it is now a security software company that focuses primarily on IoT (Internet-of-Things). And yes, this is an attractive growth market, especially with emergence of 5G and autonomous cars. The fact is that securing software at the edge is far from easy.
To get traction, BlackBerry has been aggressive with its partnership strategy. For example, the company recently teamed up with AWS to help with its intelligent vehicle data platform. In fact, BlackBerry QNX has design wins with 19 of the top electronic vehicle (EV) OEMs, which represent 61% of the market.
This traction was definitely attractive for Reddit investors and BB stock, which went from $6.50 to $29. However, as things have cooled off, the price is now at $13.
Nokia is similar to BlackBerry. Both companies lost their lucrative mobile phone franchises and had to diversify into other businesses. As for Nokia, the focus has been on the development of infrastructure and equipment for telecom networks.
Now the 5G wave was supposed to bolster the business, but the results have been mostly mixed. One reason for this was a miscalculation on the product roadmap. And another issue has been the intense competitive environment. For example, Samsung is making inroads in the 5G market.
Regarding the Reddit trade, this was mostly a blip. NOK stock went from $4 to $6.6. However, shares have since settled to $4.20, which is mostly where the consensus price target is for Wall Street.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.