Most investors didn’t bat an eye when Electric Last Mile Solutions (NASDAQ:ELMS) declared bankruptcy earlier this week. Not that they had much reason to. The microcap electric vehicle (EV) producer hadn’t traded above $1 per share since April and has been declining steadily since 2021. But after news hit markets that the company had filed for Chapter 5, ELMS stock did the unexpected; it began to rise and kept spiking until it reached staggering gains.
What’s Happening With ELMS Stock
ELMS stock began rising in pre-market trading this morning. It spiked more than 30% but after markets opened, the surge escalated. A few hours later, the stock had skyrocketed 200% although it has since dipped. As of this writing, it is still up almost 120% for the day though it still has yet to pass $1 per share.
This type of surge from a microcap penny stock calls to mind a classic meme stock pump and dump. Is that what we’re seeing from ELMS? Let’s take a closer look.
Rise of the Bankrupt
This phenomenon might seem odd but it has almost been a trend this week. Yesterday another company that had recently reported bankruptcy news began to rise. Wall Street expected a massive sell off after cosmetics retailer Revlon (NYSE:REV) announced it would soon be filing for bankruptcy. “The company’s jump appears to be a consequence of renewed short squeeze interest,” noted InvestorPlace writer Shrey Dua. Indeed, REV stock ended the day on Wednesday up almost 20%.
While REV is down 8% today, the spotlight is on ELMS, as it should be. A quick look around Twitter (NYSE:TWTR) reveals that many investors are speculating on the stock, noting its short squeeze potential. Others see it as a classic pump and dump scheme on a company that only contrarians would bet on. It attracted the attention of some high-profile names such as investor and musician Tommy Coops.
— Tommy Coops (@ohheytommy) June 16, 2022
At first glance, the ELMS stock surge is not unlike what Wall Street saw from a similar EV company when Mullen Automotive (NASDAQ:MULN) also shot up. But as shaky as MULN stock appears to be, the company hasn’t issued any warnings as dire as declaring bankruptcy. That means it can technically still demonstrate sustainable growth, though there is little to suggest that it will. For companies like Electric Last Mile Solutions that are already bankrupt, there is no real chance of a recovery.
Nightmare for ELMS Stock
It’s easy to see why stocks on their way out like ELMS and REV would make tempting plays for contrarian investors. But they can only be profitable as pump and dump schemes and as is clearly happening now.
While traction for ELMS stock is high among the Twitter investing community is high, it has received few mentions on Reddit. This suggests that as markets prepare to close, investors are getting ready to walk away from ELMS stock. And they’re already focused on the next flash-in-the-pan penny stock surge. While betting on the bankrupt may become a trend, it doesn’t mean that the stocks in question will ever make smart investments.
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On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.