This article is excerpted from Tom Yeung’s Profit & Protection newsletter dated Aug. 5, 2022. To make sure you don’t miss any of Tom’s picks, subscribe to his mailing list here.
On Aug. 2, AMTD Digital (NYSE:HKD) briefly touched $2,555 in a bewildering day of trading. With 185 million shares outstanding, the 50-person Hong Kong company would have theoretically been worth $470 billion — more than PepsiCo (NASDAQ:PEP) and McDonald’s (NYSE:MCD) combined.
Parts of social media immediately lit up like a Christmas tree.
“$AMTD reminding me again of the Past,” one online user reminisced on the stock discussion board Stocktwits. “$AMTD 🚀🚀🚀” wrote another. Shares of another Hong Kong firm, Magic Empire Global (NASDAQ:MEGL) would quickly follow suit with a “mystifying” 2,325% gain.
That’s having investors far and wide asking themselves:
Are meme stocks back?
AMTD Stock: Are Meme Stocks Back?
The meteoric rise of AMTD, HKD and MEGL has understandably sent media outlets drawing parallels to the GameStop (NYSE:GME) stock mania of 2021.
“AMTD is in some ways the perfect meme stock,” noted Brendan Ahern, chief investment officer at China-focused ETF provider KraneShares. “AMTD Digital had a very small float… [and] there was likely a short squeeze.”
And CNBC would quickly crown AMTD as “The $300 billion meme stock that makes GameStop look like child’s play” while Bloomberg would highlight MEGL for its “dramatic price surge.”
The comparisons are understandable. Much like GameStop, the Mega Millions lottery and my New Year’s resolutions to exercise more, these rocketing stocks offer the one thing people need:
To the casual observer, it seems as if meme stock trading has returned.
More Squid Token, Less GameStop
Yet, look closer at these Hong Kong stocks, and several questions quickly emerge.
1. Sporadic Trading. Trading in AMTD and HKD stock has remained patchy at best. 1-share trades continued to dominate, even as prices reached a peak. A similar pattern is emerging in MEGL stock.
These 1-share trades are a tell-tale sign of broken orders during a liquidity crunch. (Occasionally, these are also signs of algorithmic traders attempting to “discover” prices by triggering small trades). It’s just as likely that insiders are ham-handedly exchanging shares.
2. Low Social Media Attention. Social media chatter has remained firmly on Stocktwits, with few investors picking up the story on Reddit’s r/WallStreetBets, Twitter, or other sites with larger audiences. Without this critical mass, fast-moving stocks typically fizzle out within days.
“AMTD is not a meme,” one post on WallStreetBets wrote in response to the CNBC article. “It’s a blatant Chinese scam, and WSB doesn’t have anything to do with it.”
3. Low Float. Finally, AMTD and MEGL’s low floats makes them more similar to over-the-counter (OTC) penny stocks, a world where absurdly large market caps can happen daily.
The National Art Exchange (OTCMKTS:NAEX) is a prime example of this phenomenon. The inactive OTC stock last traded at $20, according to data from Thomson Reuters. With 100 million shares outstanding, the firm is theoretically worth $2 billion — almost as large as high-growth startups C3.ai (NYSE:AI) and Digital Turbine (NASDAQ:APPS).
Then there’s the case of Your Hometown Deli, a New Jersey sandwich shop that once traded at $113 million. “By deli standards, Your Hometown Deli in Paulsboro, N.J., is not a very successful one,” noted New York Magazine in 2021. Yet, “the deli’s parent company, Hometown International… is a publicly traded company valued at nearly $100 million.”
AMTD’s share structure mirrors these thinly traded companies. Only 20 million of the ADR’s 185 million shares are available for trading, and even that figure could overstate the firm’s free float. And as for MEGL… 2 shareholders own 63% of the listed company.
Readying for a Rebound
Nevertheless, stock markets are beginning to see a return of animal spirits. Last week, shares of Getty Images (NYSE:GETY) jumped 185% after launching a successful IPO. And meme favorites from tool maker ToughBuilt (NASDAQ:TBLT) to bankrupt cosmetics maker Revlon (NYSE:REV) have seen double-digit gains.
$10,000 invested in these three companies last week would be worth $20,600 today.
Main street investors have also seen a turnaround. Shares of Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and other tech giants have rebounded on a better-than-expected earnings season. And the Merrill Lynch Option Volatility Estimate (MOVE) — a bellwether of credit market fear — has fallen almost 20% in the past month.
These are signs that markets are now looking beyond Fed Chair Jerome Powell’s inflation concerns.
In other words, AMTD’s rise only coincided with the stock market’s return… it didn’t cause it.
That’s why I’m reiterating my long positions on three top “Moonshot” picks:
- Desktop Metal (NYSE:DM). The Boston-based 3D printing firm is already up 60% from my takeover target price. But at $2.50, it’s still a one-sided bet on the future of American manufacturing. The firm is worth at least 3x higher than current levels.
- RealReal (NASDAQ:REAL). The online marketplace for used luxury goods is up 15% in the past week. Given its high growth and low $2.70 share price, there are still many good reasons for investors to buy.
- Ginkgo Bioworks (NYSE:DNA). The fast-growing startup is on the cutting edge of bioengineering. And with prices still at $3, investors have plenty of high-growth potential to come.
These three firms represent the best of the Profit & Protection picks. Not only does each score an “A” or better in the Profit & Protection system. All three have significant downside protection while leaving room for 5x-10x gains.
Consider Ginkgo Bioworks. The bioengineering startup trades at a fraction of its $10 SPAC price. Yet, the company has managed to exceed its $100 million sales projection while building out its intellectual property. At $3 per share, it’s a takeover target for any larger company that can afford it.
Meanwhile, Luke Lango has also found a small company trading under $4 rumored to be helping Apple create its potential next trillion-dollar product.
I’d ordinarily give you the name of this company…
But I can’t say it here.
So instead, I’d like you to click here to see Luke’s presentation on the company that could propel the Apple Car into existence.
Meme Stocks Are Nothing New… And AMTD Proves It.
Every so often, a new investment captures the imagination of the media circus.
Tesla… AMC Entertainment (NYSE:AMC)… Crypto tokens…
These investments can include everything from a) the great, to b) the utterly absurd, and everything in between.
Squid Token (SQUID-USD) — a cryptocurrency token based on the popular Squid Game TV show — would eventually lose investors $3.3 million after a BBC article unintentionally popularized the scam token.
Yet, these investment “pumps” have happened before. As reported by Barron’s, 18th-century England saw investors set up a company to produce radish oil. It had no known use.
Another firm was organized “for carrying on an undertaking of great advantage, but nobody is to know what it is.”
Fast forward to today, and investors can use these same stories to describe most SPACs and shelf corporations. Tracking sites count at least 635 SPACs with no pending deals.
Like their predecessors, many of these opaque entities are built to enrich insiders. Show me someone who made a million dollars from AMTD, and I’ll show you a well-connected Chinese financier who likely bought in months ago.
But some of these Moonshot companies do end up succeeding. Walmart (NYSE:WMT) once traded over-the-counter before earning a listing on the New York Stock Exchange (NYSE). And companies like Desktop Metal with cutting-edge IP could well become tomorrow’s Honeywell International (NYSE:HON)
The trick is understanding the difference between a high-potential stock and one that’s riding a wave of overoptimism. Because once investors understand the context of AMTD’s unusual rise, the echoes of an Economist writer ring particularly true.
“There is nothing new on Wall Street.”
Tom Yeung is the editor of Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad. To join Profit & Protection — and claim a free copy of Tom’s latest report — go here to sign up for free!