Stock Market Short Squeeze
A Tale of Two Companies: “Game Stop” and “AMC Entertainment”
If you already know what a Short Squeeze is, and how it works, scroll down to skip the next several paragraphs. But for those who want or need an explanation, continue reading.
DISCLAIMER: I am NOT a Financial Adviser. This article is for information and entertainment purposes only. Investors should consult with their own financial advisor and do their own ‘due diligence before buying any stock or investment.
What is a ‘SHORT SQUEEZE?’
Believe it or not, you don’t actually have to own a stock to sell it! How do you do that? How can you sell something you don’t already own?
I know it sounds crazy or even illegal, but it’s not. It’s done every day in the stock market. A stock trader borrows the stock to sell, from someone who already owns the shares (usually a market-maker), and agrees to give it back to the owner at a later date, along with some interest for his trouble. This trading process is known as ‘Selling a stock short’ or simply ‘Selling Short.’
It’s called ‘short’ because the individual trader is ‘short’ the stock once he sells it, meaning that the shares he borrows are now his liability. That is, once the trader borrows the stock, he is obligated to return the same number of shares back to the owner (via a broker) along with some interest at some later date.
Why do it? Why borrow the shares just to immediately sell them? The trader does it because he has reason to believe the price of the stock will decline, or possibly even tank in value. Then, after the stock declines or tanks, the trader buys back the shares he borrowed, but now he buys them at a lower price (if he can), and returns them to the market maker whom he borrowed them from. The trader gets to keep the difference in the price of the stock that he sold, and the price he paid to repurchase them.
But isn’t selling short risky? Yes, short selling can be very risky because there is always the possibility that some other person or company may decide to buy the stock after the stock has been shorted and drive up the price before our trader has a chance to repurchase the shares. In other words, our hypothetical trader may have to pay a higher price for the shares than what he sold them for, and if so, he will suffer a loss on the trade.
What’s worse, there’s no theoretical upper limit to the price that the stock may go. This is the risk the short seller takes. If other investors in the market get wind that a company takeover is ‘in play’ or imminent, or the investors decide they just want the stock for whatever reason, they may purchase shares ahead of the deal to further drive up the price of the stock.
Why do we care about a short squeeze of a stock?
If the outstanding stock owners of a heavily shorted company hold tightly to their shares and refuse to sell them at a low price, the short sellers will be forced to bid up the price until the stock owners are willing to part with them. There is an old saying in the stock market that, “everyone has their price!” (After all, raising capital and making money is the purpose of the stock market.)
The “Game Stop” Short Sell (January 2021)
A brick and mortar retail company called “Game Stop” which sold computer games and consoles and had already been in decline for a few years due to online computer sales competition when the 2020 pandemic hit. The pandemic declined foot traffic into the stores making sales even worse.
Finally sometime in early 2021, seeing the company was in serious financial trouble, the short seller vultures moved in for the kill.
But little did they know there were ‘white knights’ hiding in the wings. There were millions of game playing millennials and others who loved their Game Stop stores, and armed with social media: Twitter, Facebook, YouTube and Reddit/WallStreetBets, they united to save their precious ‘Game Stop’ company from financial ruin by the short sellers.
What happened? The hedge fund short sellers lost billions of dollars and made tens of thousands of game players rich when the small investors forced the hedge funds to cough up billions of dollars to replace (or cover) the stock they had borrowed to short ‘Game Stop’ stock.
This was big news, and Wall Street noticed… as did the rest of the world.
AMC Entertainment Corporation
OK, now that we know what selling short is, and we have a brief recent history of ‘ Game Stop,’ let’s see what’s going on today with AMC Entertainment Corporation.
We all know the movie theater industry got hit hard by the Covid-19 pandemic in 2020 when the government forced them to close their doors to avoid spreading the disease.
Thankfully, the movie industry situation improved in early 2021 when Pfizer and Moderna rolled out vaccines by the millions in the USA, and movie theaters were once again permitted to show movies, albeit at a reduced (30%-50%) customer count.
But by early 2021, AMC had already suffered mightily, and the company executives tried to raise money by issuing (and selling) 500 million new shares of stock to keep their doors open. But the sale of new stock had to be approved by the AMC shareholders who rejected the idea. After all, there were only about 400 million shares outstanding at the time, which meant the value of their shares would be more than cut in half.
The company probably would have gone under if not for the efforts of the individual AMC movie franchisees who stepped up to help keep the corporation alive.
However, today is May 27, 2021, and the story is not over, not by a long shot. (Pun intended.)
To make matters worse, there are now new home streaming services like Disney Plus, HBO Max and Peacock in addition to Netflix and Hulu which gave even more competition to the movie houses. Indeed, there are many hedge fund managers who think America will not return to the theaters and risk getting sick, even if they are now vaccinated. They think AMC will still go under, and at one time they shorted about 25% of AMC stock. (Note: The amount shorted can vary day to day. Check with your stock broker to see the current percent which has been shorted.)
Cue the doom and gloom music! The vultures are circling.
Once again, enter the little guys, the retail investors. These are the investors who want to squeeze the hedge funds. They are attempting to buy up as many AMC shares as they can to squeeze the short sellers to pay more for the stock.
What’s different this time? We have the recent history of what happened just five months ago with ‘Game Stop.’
Everyone learned a huge lesson from the Game Stop short squeeze, and the retail investors are now doing daily battle with the hedge fund managers in the market. This battle is reflected in the daily price of AMC stock as the retail investors try to gain control and prevent the hedge funds from being able to buy back their borrowed shares at a reduced price.
It remains to be seen who will win this on-going stock market battle. There are those on Reddit who believe they can force the cost of AMC stock to $20,000 per share (or more) and become stock market millionaires. And there are the hedge fund managers who are also buying the shares while they are cheap (about $12 per share), so they don’t ‘get caught’ like they did back in January with Game Stop.
Who will win in the end? I don’t know. But this is a dramatic drama which is taking place before our very eyes.
My Disclosure: And just to come clean with a full disclosure, I have purchased a small number of AMC shares so I can make some money if the retail investors manage to squeeze the big boys once again in the coming weeks and months.
DISCLAIMER: I am NOT a Financial Adviser. Do your own ‘Due Diligence,’ before making any investment. Consult with your own financial adviser before making any investment in the market. (And remember, this is a stock market gamble. There are two sides to every trade, a buyer and a seller. There will be winners, and there will be losers. Don’t risk any money you can’t afford to loose.)