The surge in recent days – GameStop has risen to around $ 90 from $ 19 since January 12 while BlackBerry Ltd. has risen 170% this year – has raised concerns about bubbles in stocks on which hedge funds and other speculative players had bet value. To some on Wall Street, the moves have also started to seem symbolic of a stock market that may be overvalued at the end of a year dominated by floods of fiscal and monetary stimulus to ease the coronavirus crisis.
“This is hardly an environment in which sophisticated investors trade to establish price discovery,” said Mike O’Rourke, chief market strategist at JonesTrading.
The benchmark S&P 500 has gained more than 70% since March, with analysts blaming stock price movements of several loss-making companies on herds of amateur investors seeking advice on Reddit threads or the Facebook group. private Robin Hood’s Stock Market Watchlist.
Venture capitalist Chamath Palihapitiya said in a tweet that he bought $ 115 call options on GameStop, a games and electronics retailer, on Tuesday morning after an exchange with the founder of Reddit, Alexis Ohanian. These give him the right to buy the shares at $ 115, if he wishes.
GameStop gained 22% to $ 93.70 in morning trading, well below Monday’s intraday high of $ 159.18, but extending its winning streak to a fourth straight session. The US stock market as a whole was pretty much flat that day.
Will it end badly? Sure. We just don’t know when.– Thomas Hayes, Capitale de Great Hill
Much of the action has focused on stocks that have been heavily shorted by other market participants – an area traditionally dominated by hedge funds. Shares of Evotec, a German-based pharmaceutical company, rose 8% on Tuesday, with three traders reporting that hedge fund Melvin Capital Management was closing its short positions after suffering losses on some bets.
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Melvin previously held a 6.2% short bet against Evotec, according to documents filed with the German regulator. The fund did not respond to requests for comment. Short sellers typically bet against stocks of companies that they consider outdated in their business models or overvalued. BlackBerry shares are trading at a before 12 month P / E ratio of 117.22, while online retailer Etsy has a multiple of 93.44. At this level, investors pay $ 93 for every dollar of actual profit from the underlying company.
In contrast, Apple Inc., the world’s most valuable publicly traded company, has an expected 12-month P / E ratio of just 34.46. Etsy jumped 9% on Tuesday after Tesla Inc. CEO Elon Musk, also often a focal point for savvy social media traders, endorsed the company in a tweet.
Investor Andrew Left is more convinced than ever that GameStop is a dying company and that its stock price will drop sharply. Left shorted the company’s stock when it traded around $ 40 a share and publicly announced that it would drop to $ 20 a share. He said on Tuesday he was still shorted.
“Is this going to end badly?” Of course. We just don’t know when, ”said Thomas Hayes, managing member of Great Hill Capital in New York. “The most optimistic estimate of the street [for GameStop] is $ 30 a share, which would be perfect on all of the company’s most optimistic initiatives. ”