Last Wednesday, CNBC discovered a fact that Moonshot investors have known for years: meme short squeezes don’t last forever.
“Durations varied and some experienced significant volatility even before finally cratering.”
Well, you don’t say…
Outsiders might assume that Redditors are knee-jerk investors who unthinkingly follow their friends. It’s a tidy little theory that makes retail investors sound like the irrational ones. (After all, no one can predict the next hot meme).
But as a group, retail investors eventually find the right price for a stock — even if it takes a month or two. GameStop’s resurgence comes after the company hired ex-Amazon leaders. BlackBerry (NYSE:BB) and Nokia (NYSE:NOK) are quietly turning their business around.
As many short-squeeze plays continue to unravel this week, it’s going to create some Moonshot opportunities both long and short. Because as the tide of retail money goes back out (and Zoom calls revert to in-person office meetings), Reddit investors will soon punish the companies that haven’t been wearing pants all this time.
Rising Stars: Short Shorts: Fashion for a Long, Hot Summer
When I wrote about Finding the Next AMC last week, it’s no surprise that my pick with the heaviest short interest, Express (NYSE:EXPR), jumped 25%.
The mall-based clothing retailer didn’t have much going for it besides a low share price and a recognizable r/WallStreetBets presence. But that didn’t stop Reddit users from eyeing the company’s 10% short interest and smacking their lips.
As if on cue, Wall Street jumped on the bandwagon. Last week, shares in Geo Group (NYSE:GEO) and Corecivic (NYSE:CXW) rose 20% as traditional investors jockeyed to find the next short squeeze. Never mind that most retail investors have long despised for-profit prison companies. If it looked enough like the next AMC, Wall Street (and some Redditors) seemed ready to buy.
The madness is creating opportunities for those who can tell the good long-term buys from the bad. (For the record, Geo Group fell 20% the following day)
So, here are the three styles of highly shorted companies to prepare yourself for this summer.
- The Real Deal. Companies like GameStop and Blink Charging (NASDAQ:BLNK) might not have a proven business yet. But their leaders are using their Reddit-driven share prices to raise capital and shoot for the moon. These are risky bets, but their potential revenue growth can make them worthwhile long-term holdings.
- The Cheap Dates. Firms like Tanger Factory Outlets (NYSE:SKT) and Bed Bath & Beyond (NASDAQ:BBBY) are often inexpensive for good reasons. But because these companies are so cheap (and often have high operating leverage), it doesn’t take much improvement to make these companies profitable again.
- The Pretenders. Companies in decline like Geo Group and Lordstown Motors (NASDAQ:RIDE) might look good initially but have little hope of long-term success. Their share-price bumps will likely go as wasted opportunities as management struggles to get anything done. Buy put options to profit from these firms.
So, how can you tell the Daisy Dukes from the cutoff jeggings? Besides knowing it in your heart-of-hearts, a combination of high expected revenue growth and momentum can help get you started.
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Falling to Earth: The Electric Vehicle Shakeout Continues, One Fire at a Time
To hammer home the dangers of holding Pretenders for too long, let’s take a look at a poster child: Lordstown Motors.
I’ve long warned investors that the EV maker’s three-step con job wouldn’t fool investors forever. After six long months, Wall Street is finally waking up; CEO Steve Burns was better at selling pickups to investment bankers than to Main Street.
Last week, the electric vehicle startup revealed that it was running out of cash. Shares are down one-third in a week.
“The Company believes that its current level of cash and cash equivalents are not sufficient to fund commercial scale production,” they reported in their latest quarterly report. “These conditions raise substantial doubt regarding our ability to continue as a going concern.”
For a firm that wants to sell pickup trucks, not building them is a pretty bad thing.
Moonshot investors have known to steer clear of Lordstown Motors. The Endurance pickup has a $45,000 starting price — far higher than most commercial buyers would ever pay. And its 7,500-pound towing capacity looks suspiciously low for a pickup that packs 600 horsepower. (In other words, the truck is so heavy that much of its power gets spent hauling its batteries around). Not to mention that we found out about a significant test fire from the Detroit police blotter.
Don’t be surprised if Lordstown continues to sink. Reddit investors are smarter than you think. And this time, they aren’t biting.
By the Numbers: The Rise and Fall of Lordstown Motors
|600,000||Annual production capacity of the Ohio complex bought by Lordstown in 2019.|
|$750 million||Amount raised by Lordstown’s SPAC merger with Diamond Peak Capital last August.|
|$125 million||Net loss Lordstown reported in the first quarter of 2020.|
|$0||The amount Lordstown has raised from vehicle presales so far. Unlike Tesla, Lordstown does not require customer deposits for its supposed 100,000 presales.|
Interesting Reads: Reddit, Moonshots and Altcoins
Faizan Farooque takes a stab at which popular Reddit penny stock could be the next breakout star. Here are his seven picks.
AMC’s management has played the pump-and-dump better than any other meme stock has, according to author Wayne Duggan. Here’s his take on how to play the stock.
For those looking to buy altcoins, Brenden Rearick lists some exchanges where you can get your hands on a recent winner, Kishu Inu (CCC:KISHU-USD).
Closing Thoughts: The Shorts Will Rise Again
Moonshot investing can take many forms.
Sometimes, you’re looking for technologies that can change the world. These are the growth stocks — green energy, infotech, biotech companies and more — that will dominate in a decade’s time.
Other times, you’re looking for a cheap turnaround that retail investors can ride. These highly shorted bargain-bin finds are usually stocks that Wall Street loves to hate.
The pendulum constantly swings back and forth between these two extremes. The Mary Meekers of the 1999 tech bubble eventually cede ground to the Buffetts of the 2000s. Today, Cathie Wood and Chamath Palihapitiya have retaken the lead.
Who knows if the recent resurgence of value will last forever. But if you’ve picked the right Moonshot winners, it might not matter in the end.
P.S. For those interested in CNBC’s original study, it’s available here.
FREE REPORT: 17 Reddit Penny Stocks to Buy Now
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.