If you thought you’d seen everything as an investor in 2020, think again. Over the past three weeks, retail investors have ruled the roost on Wall Street and sent volatility into the stratosphere for a handful of companies. Among them are movie theater chain AMC Entertainment (NYSE:AMC) and video game and accessories retailer GameStop (NYSE:GME). This unlikely popular duo rose by more than 500% and 1,600%, respectively, in January…
Wall Street expects AMC and GameStop will implode
The fuel behind these amazing rallies is Reddit’s WallStreetBets (WSB) community chatroom. Millions of users on WSB joined forces to kick-start a short squeeze in a handful of heavily short-sold stocks. A short-seller is an investor (often a hedge fund or institutional investment firm) who benefits when the price of a stock falls. However, since gains are capped at 100% and losses are unlimited, a rapidly rising share price can effectively drive short-sellers to the exit in a hurry. Short-sellers need to buy shares in order to exit their positions, which only added fuel to an explosive situation for both AMC and GameStop.
The problem is that neither company has the tools to command such a huge gain over a short period of time.
For example, AMC Entertainment was just days away from filing for bankruptcy before it began its incredible run from under $3 to as high as $20. Even after selling stock and issuing debt to raise $917 million, AMC’s future is very much in the dark. There’s no clear idea of when the pandemic will end. Plus, WarnerMedia’s plan to release its movies on HBO Max at the same time they hit theaters in 2021 could completely change the game for theater operators — and not in a good way.
The same goes for GameStop, which was late in its shift to digital gaming. Historically known for its brick-and-mortar presence, GameStop has been busy closing stores in an effort to reduce costs and backpedal its way back into the profit column. It’s not even clear if GameStop will remain relevant in the gaming spectrum in five years.
Because AMC and GameStop lack true growth potential, Wall Street’s consensus one-year price target implies downside of 54% for AMC and 73% for GameStop.
But amazingly, Wall Street sees even more downside potential for two other stocks that have recently been the apple of retail investors’ eyes.
Sundial Growers: Implied downside of 82%
What do you get when you combine what’s arguably the hottest industry on the planet (cannabis) with a flurry of retail investors looking for the next big trade? The answer is penny stock Sundial Growers (NASDAQ:SNDL).
Aside from the fact that it has a low share price, which has long been a lure for young investors, the attention Sundial is receiving boils down to two factors. First, Democrats now narrowly control Congress. That makes it more likely than ever that we could see cannabis reform enacted at the federal level. Until there’s a clear change to the scheduling of marijuana at the federal level, Canadian licensed producers like Sundial won’t enter the lucrative U.S. market.
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