Reddit Traders Squeeze GameStop, And These 5 Stocks Could Be Next

To say GameStop (NYSE:GME) has gone parabolic would almost be an understatement. In July 2020, GME was a $4 stock. This week, the beleaguered games retailer rallied as high as $243 before settling at $209.51 in after hours – representing a jaw-dropping 50X gain in less than six months. What in the world is going on? In short, an “angry mob” of “degenerates” from Reddit’s “WallStreetBets” forum discovered the power of the internet.

Source: Mehaniq / Shutterstock.com

On Reddit’s “WallStreetBets,” or “WSB” for short, 2.2 million people come together daily to discuss (often aggressive and bold) trading ideas.

The forum has been around forever, but with the GameStop trade, WSB has become the internet’s de facto War Room… a place where retail traders can wage war against Wall Street’s elite and post memes in the same breath.

How on Earth did we get here?

Unpacking WSB’s GameStop Gambit

There is a sentiment underlying the WSB forum that big-time hedge funds and institutional investors have been running the tables in the stock market for far too long. So, the posters in WSB had an idea. They would drive WSB’s entire 2.2-million-member community to buy stock in a heavily shorted company and turn the tables on Wall Street pros.

The massive bet pushed the GME stock price up significantly and forced the short-selling hedge funds to cover at a huge loss. The more the hedge funds cover, the higher GME rises. And WSB traders walk away with a tidy profit, some more than others.

GameStop became the testing grounds for WSB’s idea. It had all the right ingredients Reddit traders needed to make this epic short squeeze a reality.

Big short interest? Check. Low stock price? Check. Small float, small market capitalization and dirt-cheap valuation? Check, check and check. What’s more, it also has a widely recognized name and potential for a big turnaround through e-commerce initiatives.

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It was the dream stock for WSB to take the fight to Wall Street’s “boomers.”

And so, that’s exactly what the WSB horde did.

They pumped up GameStop, priming the pump with catalysts (such as Chewy’s former CEO becoming a Board member) to show that a big turnaround was coming.

And, above all else, they bought GameStop stock in droves.

The results?

A rapid 50X gain in what was traditionally one of Wall Street’s most hated stocks.  Perhaps the most surprising part is that there has not been a lot of short covering yet.

About 150% of the float remains short, so this is still the most heavily shorted stock in the market. If the retail traders can keep up the frenzy – a big “if” – then all those shorts are going to be forced to cover at some point, which could add even more juice to this already mind-boggling rally.

The biggest takeaway, though, is that this will happen again.

GameStop Is Just the Beginning

This is about more than GameStop stock, or the WSB forum on Reddit. This is about retail investors discovering the power of the internet to coordinate buying efforts and dramatically influence stock prices.

They used this power on GameStop. It worked better than anyone could’ve imagined. They will use this power again. And again. And again. And again.

Retail investors coordinating buying efforts through social media forums will increasingly become normal, because they now see that — when done correctly — it can work.

Not to mention, commission-free trading platforms with leverage capability are giving a new generation of “Robinhood” traders the tools they need to move stocks.

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In other words, what happened to GameStop stock, will happen again.

But to who?

It worked wonders with GameStop because you had all the right ingredients. Most stocks don’t have those ingredients that will enable retail traders to pull off a “Wall Street heist.”

But some do…

I’m talking micro-cap stocks trading under $10, with a high short interest and a fundamental catalyst that could get the retail masses excited.

In that world, five stocks come to mind:

  1. AMC Entertainment (NYSE:AMC)
    • Market Cap: $800 million
    • Stock Price: $5
    • Short Interest (as % of float): 37%
    • Catalyst: The economy will reopen in 2021-2022 as Covid-19 vaccines are broadly distributed. Movie theaters will reopen. Pent-up consumer demand will translate into record movie-going demand. The company’s growth prospects will do a complete 180 over the next 12 months.
  2. Kandi (NASDAQ:KNDI)
    • Market Cap: $640 million
    • Stock Price: $9
    • Short Interest: 35%
    • Fundamental Catalyst: The Chinese EV maker will start selling its new, ultra-affordable K23 and K27 EV models in the U.S. in 2021. Those new cars could sell quite well, amid rising EV demand and rebounding consumer activity. If so, Kandi’s sales could explode higher over the next 12 months.
  3. Ayro (NASDAQ:AYRO)
    • Market Cap: $220 million
    • Stock Price: $8
    • Short Interest: 33%
    • Fundamental Catalyst: Ayro makes purpose-built EVs designed for short-range use (think campus security vehicles, or delivery vehicles). Democratic control of Washington D.C. could result it increased EV subsidies, which could supercharge fleet demand for EVs. Ayro could consequently sell a lot of fleet EVs in 2021-2022.
  4. Blue Apron (NYSE:APRN)
    • Market Cap: $155 million
    • Stock Price: $9
    • Short Interest: 24%
    • Fundamental Catalyst: Covid-19 compelled consumers to adopt meal kits at an accelerated pace. Some of these consumers probably liked meal kits enough to stick as customers even after the pandemic passes. Thus, Blue Apron’s growth trajectory could remain elevated in 2021 — after a blowout 2020 — the likes of which could spark a big rally in Blue Apron stock.
  5. Koss (NASDAQ:KOSS)
    • Market Cap: $70 million
    • Stock Price: $9
    • Short Interest: 43%
    • Fundamental Catalyst: Koss makes headphones. As consumer activity rebounds in 2021-2022, demand for headphones could surge, especially as consumers go back to the office and head back to the gym. Koss’ depressed sales trajectory could reverse course sharply.
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With Great Power …

To be sure, I don’t think any of these five stocks are attractive as a candidate for a retail-trader takeover as GameStop.

But that’s not the point…

Retail investors have found a new power. They’re going to use that power a lot over the next several months. The stocks above could be on the receiving end of this dynamic — and as such, they could end up soaring like GameStop in the coming months.

But tread carefully.

Just as quickly as retail investors have seized power in GameStop, they could lose it … and in all of these other heavily shorted stocks, as well.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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