A scene from the trailer for the film: Dumb Money

Courtesy: Sony Pictures Entertainment

As GameStop’s shares begin to rise in late 2020 and early 2021, in the midst of the pandemic, characters in the new movie “Dumb Money” encourage their friends to sell.

There’s Pete Davidson, who plays the brother of Paul Dano’s Keith Gill, aka Roaring Kitty, and tells the aspiring YouTube star to cash out and buy a Ferrari. There’s Anthony Ramos’s Marcus, a cashier at GameStop who is lectured by his parents that this stock trading thing isn’t real. And there’s America Ferrera’s Jenny, a nurse and single mother whose colleague tells her that taking financial advice from a man in a headband isn’t the best use of her time or money.

But these characters and the others in the film, which hits theaters this weekend, don’t just ignore that advice. They double down, buy more stocks and options, and start checking their phones and TV news incessantly to see how high the stock goes.

“Diamond Hands…we’ll hold the line,” Jenny says.

To the moon

The peak of the meme stock mania, in which retail traders on social media sites like Reddit’s WallStreetBets encouraged each other to buy and hold heavily shorted stocks, came on January 27, 2021.

That day, GameStop hit its all-time high of $86.88 per share and more than 373 million shares changed hands. A year earlier, in 2020, GameStop traded about 8.5 million shares on the same day.

It was also the highest volume day on record for theater chain AMC Entertainment, with over 142 million, up from fewer than 400,000 on the same day last year. AMC shares would hit their own record high in June.

By now, the excitement has subsided, although not completely disappeared, and traders who bought stocks that day would now be deep in the red. On Thursday, GameStop closed more than 78% below its all-time high. AMC is down more than 97% from its peak.

Reddit vs. Wall Street

Many social media traders discussed the meme stock moment in terms of “David versus Goliath” – the retail traders versus the hedge funds.

And retailers have won at least some of the battles. The massive rises in stocks were caused in part by “short squeezes,” which occur when a rising stock price forces those investors betting against the company to cover their position by buying back shares to limit their losses, creating a feedback loop that drives the price stock even higher.

The losses caused Gabe Plotkin, a short seller played by Seth Rogen who was betting against GameStop with his hedge fund Melvin Capital, to close his fund entirely.

There were also allegations of fraud.

The high level of interest in short selling and the appearance of several meme stocks on the SEC’s “Fail to Deliver” lists fueled the theory among retail traders that “naked” or synthetic short selling was afoot. However, an SEC staff report on GameStop found no evidence of naked short selling.

Another center of controversy has been the brokerage firms themselves, particularly Robinhood.

Several brokers restricted trading in meme stocks at the height of the meme stock mania. The massive stock moves combined with strong options trading activity appeared to overwhelm the ability of companies like Robinhood to manage risk.

Robinhood itself went public in July 2021. The stock is down more than 70% from its IPO price.

AMC and GameStop

As for the meme stocks themselves, it’s still unclear whether some Reddit traders’ basic theories were correct.

The turnaround efforts at GameStop by Chewy co-founder Ryan Cohen, who became something of a hero for retailers, have had little success. Former Amazon executive Matthew Furlong was ousted as GameStop CEO in June after about two years on the job, just one step in a series of leadership changes at the company.

The financial results were also disappointing. According to the latest report, the company generated net sales of almost $1.2 billion in the second quarter of 2023. In the second quarter of 2019, before the meme stock craze began, the company generated net sales of about $1.3 billion.

Meanwhile, AMC CEO Adam Aron has taken on the theater chain’s meme stock status, offering shareholders rewards like popcorn.

The company has also used its popularity to raise additional cash by selling more shares. AMC announced Wednesday that it has raised more than $300 million in a capital raising made possible by a preferred stock corporate financing maneuver called APE shares — a cheeky nod to one of the references adopted by Reddit users had.

The new money was certainly a big boost for AMC as its box office still struggles to reach pre-pandemic levels, but the theater chain also took the strange step of purchasing a stake in a gold mine.

The AMC stock sales have diluted individual shareholders’ holdings, and AMC’s market cap is still more than 50% below its peak.

For the Wall Street titans who became enemies of Reddit traders, the results were mixed. Several short sellers said they had exited the trade after the meme stock squeeze, even though other trading firms likely made profits in the highly volatile markets.

And even after his fund suffered heavy losses, Plotkin still had enough money to buy a controlling stake in the Charlotte Hornets NBA franchise.

A scene from the trailer for the film: Dumb Money

Courtesy: Sony Pictures Entertainment

At the end of “Dumb Money,” the film shows the wealth increase of many retail traders who have sold their stocks, presumably near the top. Several of the characters earned more than $100,000 from their businesses.

But Jenny, the nurse character whose Reddit name was “StonkMom,” was still holding on to the stock — her net worth had fallen below zero again.

Source : www.cnbc.com

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