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FOMO was dangerous last week.
Several investment textbook issues appear likely to carry over into this week and to stay with us for some time. The dangers of FOMO are at or near the top of the list and worth watching with the continued cooling of the Reddit trading frenzy when set against current market dynamics.
GameStop had started the year in the $17-$19 range but as a result of some mavericks who insisted they were out to show the hedge fund folks on Wall Street a thing or two, shot up to a high of $483 on January 28. Similarly, AMC Entertainment Holdings Inc. which has been staving off bankruptcy and started the year at $2.20 – not surprising given the status of movie theaters during the pandemic -- shot up to $20.36 on January 27.
GameStop closed on Friday at $63.08. Meanwhile target prices for the stock range from $33.00 at Telsey Advisory all the way down to $16.00 at Wedbush Securities and even down to $1.60 at Merrill Lynch. Some investors now face a choice of selling at a loss or hanging on indefinitely in hopes of eventually breaking even and neither option is appetizing.
By comparison, AMC Entertainment Holdings closed on Friday at $6.83 but still well above target prices of several analysts. MKM Partners and Credit Suisse have ‘Sell’ ratings on it. As someone who has more than a passing knowledge of the film industry, I feel that their ratings at least merit serious consideration.
However, the bigger picture here extends to the concept of gamification and the players in the game. “For many of the buyers this was no different than an online game,” suggests Jay Nash Senior Vice-President at National Bank Financial. “They put in a few dollars to support the cause and figured if enough of them did it the “evil” hedge funds would fall,” he says.
Those with early success became emboldened and more players joined in to push up the price.
And they did so sadly: many of them did not completely understand the frenzy or the process. “These investors had NO IDEA what price they were buying at. It was pure FOMO (Fear of Missing Out)” Nash explains.
Nash has hit upon one of the most dangerous criteria sometimes entering an investment decision: FOMO drove a huge proportion of investment decisions in the Reddit saga and likely figures in some other rapid rises. There is a fine line between FOMO and ‘fad’.
As with GameStop those that lead the battle against the big bad hedge fund guys in New York made serious money. But many others have shares worth a fraction of what they paid.
Maintaining a near religious belief that the individual investor can beat Wall Street requires more than a fleeting win.
What remains to be seen this week is whether regulators take strong steps to prevent a repetition or continue saying that the investor has to be protected.
What also remains to be seen is whether another frenzy erupts this week and Nash views that as unlikely “I don’t see anything coming to the level of GME....the “attack” has been thwarted and the “forces” scattered,” he says. “They thought they had won a game they didn’t fully understand and have now been hurt by the reality.”
And another effort could require an evangelical-type leader to get amateur investors worked up.
Somewhat more calm and longer running, the electric vehicle or EV phenomenon merits serious watching, according to Dan Ives, Managing Director of Equity Research at Wedbush Securities in New York. Last Monday Ford announced plans to spend $29 billion on electric and autonomous vehicles through 2025.
What is surprising is not the move because the field is heating up but that this is double Ford’s previously allocated commitment. That followed plans by General Motors to go ‘all in’ on electric vehicles by 2035 and reports of Apple’s plans for a joint EV venture, possibly with Hyundai Motor Co.
Investors and analysts would prefer that if Apple joins the EV rush – as appears likely – that it do so in a joint venture with an established auto manufacturer. Since Apple is not now a car maker, the huge cost, size of the undertaking and product risk make the joint venture route the most likely.
The rush to EV has started taking shape and Ives makes a bold case for its acceleration. “We believe overall that EVs, which make up 3% of global auto sales today, could reach 5% by the end of 2021 and 10% by 2025,” he says.
Although Elon Musk and TESLA have the lead in the race with factors such as instantly recognizable brand, China footprint, battery technology and first mover advantage, the moves by Ford and GM are emblematic of what’s to come.
And while some developments are still on the drawing board, investors can at least consider some leading players in the rush to market.
In North America, TESLA is the undisputed main player with Ford and General Motors ramping up. In Europe, Ives points to Audi and Volkswagen. In China he highlights Nio Inc. and Xpeng Inc. which trade on the New York Stock Exchange and Li Auto Inc., which trades on the NASDAQ.
(The decision to invest in these stocks would ideally be preceded by a chat with a financial advisor about factors such as the individual’s risk tolerance and a look at whether the de-listing of Chinese firms for security reasons has any impact on otherwise unrelated Chinese securities.)
Another possibly longer-running trend to watch this week is the move towards Special Purpose Acquisition Companies, commonly SPACs. The SPAC is best understood as one of three routes for a company to go public. All three routes are seeing increased activity, explains James Athey, Investment Director at Aberdeen Standard Investments in London.
In the Initial Public Offering or IPO route the company hires an investment bank to sound out interest among their client base and use this information to derive an initial share price.
In the second route – the direct listing -- there is no lockup period for private owners of the company “This may be good for them but may put off some potential new investors as they worry that existing holders can cash out and maybe there is some negative information in their apparent desire to do so,” Athey explains. With SPAC’s – sometimes called ‘blank check firms’–the organizers assemble a large pool of cash. A SPAC acts more like a reverse private equity fund whereby capital is raised without any specifics at that time about which company is to be taken public. It then finds a desirable takeover target. “A SPAC then simply merges with the private company to create a public company made up of the SPAC’s publicly traded shares and the previously private entity’s business assets (and) staff,” Athey explains.
This adds a second layer of risk to the investment decision. When buying shares in a traditional stock company the investor has confidence in the company’s management, its prospects, and its ability to crises like the pandemic or overseas political problems. crises. With a SPAC the investor is also risking the judgement of organizers to make a profitable choice of acquisition target as well as the target’s viability.
Disclosure: I do not own any shares in any company mentioned in this column.
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