The strategy behind these two stocks no longer holds water.
One of the hardest things about investing is knowing when to sell. Go too early and you’ll lose future profits, too late and you lose everything. There’s no shortage of reasons why you would need to sell… tax purposes, management changes, or a personal emergency that requires capital. The most common reason for needing to sell though is when the original reason for investing in a stock simply isn’t there anymore.
It can be a disappointing realization. When you back a stock, particularly over the long-term, you’re hoping the business will grow. To see it fall short can be disappointing in a number of ways. The two stocks we’ve listen below have been good for us. They’ve delivered huge gains to their shareholders and been important additions to portfolios. However, we think the time has come to grab your money and run.
GameStop
GameStop (GME) has been a hugely popular stock with investors, and we understand why. This stock made headlines a while back as retail investors instigated a short squeeze that pushed the stock’s value from around $20 a share to nearly $500 in a matter of days. That has meant that shares are 794% higher on a year-to-date basis and up more than 3,900% over the previous year.
The squeeze was remarkable, and whereas short squeeze candidates give back their gains pretty quickly, GameStop has been able to hang onto a good portion of its increase. The reason? Good, old-fashioned business manoeuvring. GameStop wasn’t in dire straits before the squeeze. In truth, management were fully capable of raising the necessary capital to pay off debts. In April, GameStop raised $551 million in gross proceeds selling 3.5 million shares, and it tacked on $1.13 billion in June after selling 5 million additional shares. With no debt and abundant cash, GameStop isn’t a bankruptcy risk and it has more than enough capital to turn the business around.
So why exactly are we saying sell? Ultimately, look beyond the meme stock side of things, GameStop is still very much a work in progress. Sure, e-commerce sales soared 191% in 2020. But it also saw net sales drop 21.5%. GameStop was simply too late to realize that gaming was going digital and has paid the price for it. The chain is now stuck with thousands of brick-and-mortar stores, few of which generate significant revenue. Unfortunately, between now and the company’s return to profits, many more stores will need to close.
It’s also true that the potential for a short squeeze simply isn’t appealing anymore. Even though its short interest is still a lot higher than your typical stock – 8.22 million shares held short, relative to a float of 56.41 million shares – short shares held have fallen by 31% since May. The initial squeeze is long since over and the reason for optimism isn’t there anymore.
AMC Entertainment
It’s also a good time to grab your money if you’ve invested in the cinema industry. AMC Entertainment (AMC) is the top-performing stock on a year-to-date basis with a gain of about 1,500%, so why are we saying sell?
Well, for much the same reason. Retail investors have been hard at work chasing a potential short squeeze in AMC and while there was some success in doing so late January, the May/early June rally had nothing to do with short covering and everything to do with misinformation on social media driving the share price higher.
Fundamentals matter. Prior to the pandemic, this stock had never been valued higher than $3.8 billion. In those days, AMC was profitable and had far less debt than it does today. Inevitably, things have changed and the stock is just not what it used to be. AMC is losing money hand over fist, has well over $3 billion in net debt and $473 million in deferred rental obligations, and has been losing viewers to streaming platforms at a steady and consistent rate.
The short squeeze thesis no longer makes sense. Between the end of May and the end of June, shares held short declined from 102.3 million to 75.5 million. As more than a quarter of outstanding short shares were covered, AMC’s share price declined. It took a social media mismanagement and a strong rally just to push the price back up to $72. You don’t need to be an expert to realize what a miniscule impact covering some of the remaining 75.5 million shares will have on this price.
We mentioned social media misinformation. For the last few weeks, we’ve been highlighting meme stocks and the sheer amount of influence social media-induced spontaneity can have on stock prices. This was a prime example. AMC’s retail investors have been spreading all kinds of unsubstantiated hype, purely with the intention of keeping this scheme from collapsing. But even that hasn’t been enough to arrest the drop in price. Investors are getting out of AMC, and we think you should as well.
If you’ve managed to make some money in the heydays of these two stocks, congratulations. They’ve been winners for many of our top investors, but on the basis of the above, we no longer believe the investment thesis for these stocks holds, and for that reason, we’re saying grab your money and run.
