So why do some stocks go from being unloved on Wall Street to diehard favorites of the Reddit army?
What all these stocks have in common is that a fair number of short sellers are betting against them.
And that riles the passions of the Reddit crowd, many of whom view short-selling -— when an investor borrows a stock and sells it with hopes of buying it back at a lower price and pocketing the difference as a profit — as a rigged part of the investing game designed to benefit fat cat hedge funds.
‘Squeezing’ the life out of hedge funds
The term “meme stock” may sometimes be used pejoratively, but the fact is Reddit investors are sophisticated enough to realize that by targeting stocks that are heavily shorted and don’t have a sizable amount of shares available for trading, there’s a chance to help fuel what’s known as a short squeeze.
A squeeze takes place when short-sellers have to rush to repurchase shares they borrowed because the price is rising.
The higher a shorted stock goes, the more money the short-seller stands to lose. So they have to often quickly buy the stock back to avoid losing their shirts — thus pushing the price even higher.
If a short-seller borrows a stock trading at $50 and sells it but the stock then climbs to $75, that’s a $25 loss. If it goes to $100, the short is $50 in the red, and so on. They want to get out quickly to reduce their losses, and that creates the squeeze.
Of course, AMC is not a “safe” stock per se. A lot can go wrong with the reopening of the economy. And even if things go smoothly, some argue the shares, which are now up more than 2,000% already in 2021, could eventually cool off.
Planet of the ‘apes’
The support of the Reddit crowd is grabbing attention from the meme stocks’ management teams, too.
“I’m quite optimistic about the new shareholder base of AMC,” said AMC CEO Adam Aron on its earnings call last month. “Just go on Twitter, just go on Reddit, just go on YouTube. Read what these people write. They love AMC.”
“These are not people who are just going to be investors in AMC. These are going to be customers of AMC who come to our theaters and enjoy watching movies at our theaters as paying guests,” he added. “So I love the idea that we have a passionate, committed, enthusiastic shareholder base.”
So it seems the key to finding a stock primed for a Reddit bump is to identify companies that don’t have a lot of shares available for trading. It’s easy to propel those stocks higher.