Gamestop and AMC frenzy will end up badly for most who participate
These developments have nothing to do with rational investing or even rules-based trading. Don't be fooled by 'easy' gains.
Yesterday, Gamestop and AMC Entertainment’s small-cap stock prices spiked by 75% and 78% on Monday after the so-called meme trader - Roaring Kitty came back on X (formerly Twitter) and posted for the first time since June 2021. He became famous in 2021, after regularly commenting about Gamestop and pumping the stock up with the army of retail traders in January 2021. After that, he even testified before Congress regarding these events.
Following this long introduction you probably know that the Gamestop and AMC rally has nothing to do with companies’ fundamentals and is a poor speculation.
It is also not known whether posts on his X account on Monday were made by him or the account was hacked. Anyways, the frenzy in these small-cap stocks still continues.
In pre-market trading on Tuesday, Gamestop and AMC are up 120% and 105%, respectively.
Gamestop is now up over 600% just this month and is one of the largest 500 public companies in the US, considered a large-cap stock.
Additionally, over 175 million company’s shares changed hands on Monday, 30 times the 1-year average, according to Bloomberg. This is not sustainable at all.
DO NOT TOUCH THESE STOCKS, 2021 MEME FRENZY ENDED BADLY
This short article is just a small warning that these types of speculation often end up badly for most participants and it has already finished like that in the past.
In 2021, Gamestop stock spiked to more than $90 per share or more than 1000%. Subsequently, the stock lost ~90% in value as you can see on the below chart.
Even after the Monday spike, Gamestop is still down ~70% from the 2021 peak. It has not recovered even a third of its value in 3 years. This historic event in the stock market sends a very clear message: stay away from these kinds of speculations if you do not want to lose money.
This time, there have also been many victims already. Short sellers of these 2 stocks have now lost $1.8 billion over the last 2 weeks.
On Gamestop alone, taking into account the Tuesday surge, short sellers are set to lose $2.5 billion according to Ortex data when the market opens. These are really massive losses.
WHAT SIMPLE FUNDAMENTALS SAY?
The P/E ratio of Gamestop has skyrocketed to 1,210x on Monday from ~700x. It means that currently, it costs $1,210 to purchase just $1 of earnings generated by the company. It does not look like a bargain. Moreover, this kind of stock overvaluation is rarely seen in the market. That’s why this stock will never provide any long-term gains for investors.
To put this into perspective, the P/E ratio of Nvidia is just 34x, and many people say that the chipmaker is also overvalued.
Comparing those two may not be a perfect analysis but it shows the point that Gamestop should never be bought as an investment,
Finally, former SEC Chair Jay Clayton said just minutes ago that this craziness bothers him and it is certainly not investing. He hinted that perhaps the government should intervene right now. In other words, a game over is near.
Remember, there is no such thing as a free lunch. Be careful and invest wisely.
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