The battle between retail investors of GameStop (NYSE:GME) and its institutional bears reached a pinnacle on Jan. 26 as the stock reached an all-time high of $380 per share. Over the past year, enthusiasm among traders of the legendary r/WallStreetBets subreddit was mostly responsible for its mouth-watering 7,600% return. As hedge funds who bet on the brick-and-mortar video game retailer lost multiples of their initial investment on their GameStop short, they began frantically cutting their losses by buying the stock back at whatever price possible. This added even more fuel to the flames and led to an unstoppable, monstrous rally in the share price.
After GameStop’s spectacular short squeeze, investors are now wondering if other heavily shorted stocks that are popular among contrarian Reddit investors, such as AMC Entertainment Holdings (NYSE:AMC), CEL-SCI (NYSEMKT:CVM), and BlackBerry (NYSE:BB), could replicate GameStop’s return and make shareholders wealthy in a very short period of time.
As it turns out, discipline becomes paramount when the value of one’s holdings goes up so high and so fast. While GameStop stock may have had genuine reasons to rally, not all three of the stocks mentioned can claim similar justification. Let’s take a look at which ones to buy and which ones to avoid.
1. AMC Entertainment
In the past five days, shares of movie theater chain AMC Entertainment took a 180-degree turn after years of decline. During that period, the stock more than quadrupled in value. Approximately 79% of the company’s outstanding shares are sold short.
Due to a mix of pandemic containment measures, competition from digital streaming services, and customers’ fear of contracting the coronavirus, AMC took a dramatic hit to its bottom line. In the third quarter of 2020, its revenue declined from $1.32 billion in the prior year’s quarter to less than $120 million. That’s less than the $214.3 million the company pays in rent every quarter to keep its venues operational. It should be no surprise that it had to take ample asset impairments and depreciation, which all boils down to a quarterly net loss of $901.2 million.
There is a degree of truth as to why AMC is actually a decent stock. For starters, there is a dedicated community of moviegoers who love the experience of sitting comfortably on a recliner seat, grabbing a drink and popcorn, and watching a movie on the big screen with state-of-the-art speakers nearby. But this dedicated fan base isn’t enough to make up for AMC’s huge debt problem.
Even before the pandemic started, it had a crushing debt obligation of $5.8 billion compared to less than $500 million in cash. Not only are AMC’s margins razor-thin, but it also has more than $5 billion in lease payments on top of its debt.
Its capital management, as well as revenue growth, are polar opposites of what GameStop has to offer. Even after a recent $506 million equity raise and $411 million in debt financing, the company is still in dire need of cash. For these reasons, I think AMC’s new financing efforts will only delay the problems it has to face. If investors are looking to cash in on companies that became a part of the GameStop craze, they should look elsewhere.
2. CEL-SCI
CEL-SCI is a development-stage biotech that is seeking to develop a novel immunotherapy treatment, Multikine, for head and neck cancer. Despite its noble goals, the company has its fair share of skeptics: Nearly 30% of its shares are shorted. In fact, the CEO of CEL-SCI, Geert Kersten, tweeted the following on Jan. 26 after a short squeeze caused its shares to go up 87% in the span of one month:
People like you [short-sellers] gaming the system are the reason why shorties are targeted these days. You make up the rules to screw the rest of the investors. In the case of $CVM though, the shorties are losing and paying 60% interest. And I fully expect to crush them with good Phase 3 data.
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