Steve Sosnick, chief strategist at Interactive Brokers, spoke with Quartz for the latest episode of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): GameStop And AMC are up a few hundred percent or something (since last week). Roaring Kitty posted on social media for the first time in years. Is now the time for investors to step in?
STEVE SOSNICK (SS): Should investors buy now, with a 100 percent upside after rising 70% yesterday? No. I can understand chasing momentum sometimes, but this has become insane. These stocks opened double on a second day, so no. GameStop wasn’t a fundamental asset when it was at $9 or $10. It wasn’t a $30 fundamental. It’s not a $60 fundamental. So when you get into these stocks, you have to realize that what you’re buying is simply not worth the price you’re paying. So that’s active on the charity side, it’s momentum on the non-charity side. It’s the Greater Fool theory. Momentum trading has its place, it is very risky. The Greater Fool theory really just says: I know this is stupid, but someone will do something stupider than me. That’s really a bad way to invest. What brought it back? I think we had the right conditions. I think part of this is because these things don’t happen in bear markets. This happens when markets are relatively buoyant, and with major indices at or near record highs, it’s certainly easier to get people excited about stocks. I think to some extent the meme stock-like behavior of DJT stock, the Trump media stock, was a signal to a lot of people who engaged in this kind of behavior to say: Oh wait, maybe we can get the band back together. The conditions may be ripe for this kind of thing. And in retrospect, because I really wasn’t looking at the stock last week, GameStop was honestly up about 70% in two weeks. But what was interesting was, the way it went, call it from 10 to 17, a lot of rounding, we saw a lot of buying of calls, a lot of buying in the 20-level calls, which makes sense if the stock is moving towards, you You know, 10, 15, 17, 20 is the illogical next stop. But we saw a lot more buys in 25 and 30 strike calls, things that were essentially, you know, 70 to 100 percent more than the money’s worth. And when you see that, it tells you something is going on. Again, I have to admit I didn’t see it beforehand. I don’t really want to look at GameStop in detail, but I’m forced to from time to time. That kind of primed the pump for what we saw yesterday and off we went.
AM: Yes. So you mentioned the greater fool theory. Do you think these are some of GameStop’s early meme investors trying to pump it up and get out?
Stainless steel: That could be, but on the other hand there were some posts on social media of, you see, I’ve kept this thing at nine and I’ve had it for years, and I’d like to think that some of these people, especially because it stock as it approaches 50, 60, I’m not entirely sure where it stands at this point, but if a stock is up 500% based on no fundamental news other than a key person posting a meme, that’s probably a good time to make a profit. You could say it’s a good time to short, but if you thought yesterday was a good time to short at 30 and then it’s at 50 or 60, then obviously that’s not the best trade. So you might not want to get in the way of the freight train, but you might want to do what AMC did, which is recognize that their inventory was high and use it as an opportunity to sell. I think AMC, for better or worse, has been effective in embracing their meme stock status. And when the stocks have made big jumps, they’ve sold into them. I think this is why the company is solvent right now, because they had a huge debt load and one of the ways they were able to pay off the debt was by selling the stock when things got hot. They did. So yesterday the stock is up another hundred percent, which is what the company is telling you was a good sale yesterday. But again, this is not rationality. I wouldn’t be surprised if more were sold. Companies that believe their shares are overvalued do not sell them widely. Apple announced a $110 billion buyback. They don’t sell, so keep that in perspective. I don’t blame AMC. I actually think it’s wise. There’s an old saying on Wall Street: feed the ducks while they quackand yesterday they were croaking very loudly.
AM: Yes. So the headline I get from you is: Sell the meme stocks now.
Stainless steel: If you have them, sell them. I don’t suggest shorting them because that is a very treacherous trade. So much can go wrong. Again, if you have a stock that goes up 70% one day and a hundred percent the next, I don’t want to short it. But if you bought these stocks at good prices, what are you waiting for? If you have them, I think this is a great opportunity.
AM: Speaking of shorting, it’s also an incredibly volatile time. So if you pick the wrong time, it could go up another thousand percent, who knows, because it’s not generated by fundamentals.
Stainless steel: Precisely. This doesn’t mean that if we were to do a discounted cash flow analysis and, you know, this company is trading at $90 per share, we think the discounted cash flows are $80 per share and there’s room to look at the sell side. . The company is trading so far beyond any fundamental values and so far removed from historical benchmarks. It’s basically pure momentum, pure enthusiasm, pure social media frenzy. I’m not going to wag my finger at it, but it also means that unless you really are, unless you’re both really risk-averse and really attuned to the messages that pop up on social media, it’s probably best not to get into it to jump. on this point.
More on GameStop, AMC and the meme stock rally
GameStop short sellers have lost more than $2 billion as the meme stock’s rally continues
‘Roaring Kitty’ brought back the GameStop meme frenzy. Here’s what you need to know about him
GameStop shares soar 120% as ‘Roaring Kitty’ meme stock rally continues for a second day
It’s not just GameStop and AMC. These meme stocks are also rising
GameStop meme stock mania is back. This is what happened last time
Meme stocks are back. It won’t last long, says expert
The GameStop meme stock rally sent AMC shares soaring 102% — and the company raised $250 million
