Brokerage Billionaire Warns Against Shorting AMC, Meme Stocks: Prices Could Hit ‘Unimaginable Highs’

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Topline

As shares of AMC Entertainment and other so-called meme stocks recoup losses Monday, billionaire Thomas Peterffy, the founder and chair of Interactive Brokers, cautioned investors against shorting the crop of volatile stocks, saying prices could continue to hit meteoric highs for an indeterminate amount of time before eventually crashing down to fundamental values. 

Key Facts

On CNBC’s Squawk Box, Peterffy warned investors thinking about betting against AMC and other meme stocks by shorting their shares, saying their prices could skyrocket to “unimaginable highs before they settle down to a reasonable valuation.” 

“You may have to cover on the high point,” Peterffy said, alluding to a crop of AMC short-sellers that lost $5 billion last week to close their short positions and cut losses as prices spiked nearly 140% through Wednesday.

Despite warning that shares could skyrocket further, Peterffy also said it would be “impossible” for the stocks to hold on to meteoric gains because “more and more people will be short” shares if prices continue to climb.

“Eventually these stocks will go back to their value which is roughly single-digit dollars—if that,” the 76-year-old said, ultimately recommending against holding on to shares.

Shares of AMC were surging more than 15% Monday, pushing the stock’s gains to 2,700% this year alone—more than 20 times the best-performing stock in the S&P 500, Marathon Oil.

Other meme stocks, many of which crashed Thursday, are also recouping losses Monday, with Blackberry, GameStop and Bed Bath & Beyond up 9%, 6% and 5%.

Crucial Quote 

“It is extremely tempting to short these stocks, but unless you have huge liquid resources, please try to resist the temptation,” Peterffy said Monday. “These prices can go to unimaginable highs before they settle down to a reasonable valuation, and you may have to cover on the high point.”

Big Number

$22.7 billion. That’s how much Peterffy is worth Monday, according to Forbes. He founded Interactive Brokers in 1993 and was its CEO until December 2019.

Key Background

After crashing as much as 70% in late January, AMC and other meme stocks are soaring again this month despite bouts of intense volatility. AMC stock more than tripled in the week through Wednesday as heightened options activity and increasing short interest helped retail traders once again squeeze institutional investors out of their risky bets, but shares plummeted as much as 40% Thursday after the company warned its stock has become massively overvalued. Several other meme stocks, most of which are among Wall Street’s most heavily shorted companies, have ridden the price wave in tandem. “The retail force behind this movement is still strong, so it is anyone’s guess how much larger this bubble can grow,” Oanda Senior Market Analyst Ed Moya said in a note last week.

What To Watch For

Though experts aren’t sure how long meme stocks could continue their volatile tear, many of them think regulators could ultimately clamp down on the rise of frenzied trading. In a congressional hearing last month, Securities and Exchange Commission Chair Gary Gensler suggested regulators would crack down with new rules targeted at online brokerages like Interactive Brokers and Robinhood. Meanwhile, some large brokerages, like TD Ameritrade, have already taken steps to restrict trading of AMC shares amid the recent rise.

FURTHER READING

AMC Entertainment Raises $587 Million After Skyrocketing 2,900%, But Warns Investors Could Lose It All (Forbes)

Not Just AMC: These Are The Meme Stocks Reddit Traders Are Pumping Again As Experts Urge ‘Extreme Caution’ (Forbes)

Meme Stocks Crash: AMC Plunges After Investor Warning—Sparking $10 Billion Selloff (Forbes)