What Reddit Got Right
Over the past couple of weeks, a group of self-described “degenerates" on Reddit have been rocking the stock market by targeting specific company stocks.
Despite describing themselves as degenerates and the media describing them as dumb, Reddit traders got a few things right last week.
So, though there’s been a lot of talk about how these investors are unsophisticated, uninformed, and downright stupid, I’ve got to question just how unsophisticated, uninformed, and stupid they really are.
First off, they recognized a disconnect in the market of which hedge funds had been taking advantage. And they were smart enough to realize that they could, through a concerted effort, drive up the price of a stock and force funds that had shorted it aggressively to buy shares and drive the price even higher.
That’s not something someone with no understanding of financial markets is going to see without being told. I mean, how many of you were hearing about short squeezes for the first time? And you read Wealth Daily every day.
But there are some other reasons I don’t think the folks on Reddit are that dumb — and it has to do with the companies they were targeting.
It wasn’t just any company with heavy short interest. Those all moved as the market tried to guess where they’d strike next, but they weren’t all targets.
Some of the targets make sense. Some of them actually have a potential bullish case...
The Elephant in the Room
Obviously, GameStop has been the focus of most of the commentary (and most of the short squeeze). To hear the analysts on TV tell the story, GameStop is already bankrupt.
But it’s not. It’s very close, but it’s not.
It’s a legacy business in a growing industry. It’s been around almost as long as video games, and that expertise (and name recognition) is a strength.
It also just got a new activist investor on its board in the form of Chewy co-founder Ryan Cohen. Cohen owns about 12% of GameStop's outstanding shares, and he has a seat on the board of directors.
With his background of taking a traditionally brick-and-mortar market — pet goods — and turning it digital (and very successful), he’s a strength too. And he, no doubt, already has big plans to get GameStop off the curb and onto the internet.
So there’s another bullish catalyst for GameStop.
Now, none of those strengths justified a $350 price, but they do justify a speculative position.
GameStop is a failing retailer, but it has the potential to turn things around and become a long-term growth story... once the price gets back to a more reasonable level (around $20).
But GameStop wasn’t the only target that actually has some merit behind it. A couple of other stocks Reddit targeted have real potential for massive growth in the coming years.
The “Fruits” of 5G
Remember that old cellphone with the keyboard on it? The BlackBerry? My friend had one of the first, and it looked like he was talking on a Bible.
The company cornered the market before anyone else even knew it existed. While it’s no longer making the most popular handsets anymore, it still has potential for growth.
You see, BlackBerry already had a good relationship with businesses and governments, who viewed its phones as more secure than others. Now BlackBerry provides intelligent security software and services to enterprises and governments worldwide.
It also owns over 38,000 patents related to technologies that will be used in smart cities, smart homes, driverless cars, and many other applications.
Once the 5G network is live, those patents could be worth tons.
So it’s not just a nostalgia trade. BlackBerry actually has some merit behind it.
And it’s not the only Reddit stock that stands to benefit from 5G...
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Retaking the Throne
Back in the 1990s, before smartphones dominated the market, the best cellphone you could get was made by a Finish company with a not-so-Finnish-sounding name — Nokia.
But it lost the top spot when Apple debuted the first iPhone, and it just never regained the top cellphone title.
Its management wasn’t overly dismayed, however, because it’d quietly been building out the services side of the company, knowing that there’s only so much money in phone sales.
And Nokia became the second-largest telecommunications networking solutions company in the world.
That move also set it up to be in the no. 2 spot in the telecom 5G race as well.
The only company to be further ahead in the 5G race, Huawei, has been banned from doing business in the U.S. and is losing supporters around the globe as its connection to the Chinese government becomes clearer.
So while the Reddit army may have driven the shares up higher and earlier than they’d have gotten on their own, there was real merit to the investment.
And I’ve got one more example of how the Redditors picked a pretty smart stock (whether it was at random or by design).
Another stock that took center stage in the Reddit drama was AMC Entertainment (not to be confused with AMC Networks). The company has been taking this whole pandemic lockdown thing on the chin pretty hard.
Its shares were trading for just $2 apiece at the start of 2021. But thanks to the Reddit army, they got as high as $20 each. They’re back down to $8 as I type (and still falling), but there’s some value in that trade too.
You see, we’ve been locked up for almost a year now. There’s a lot of pent-up demand to get back to doing the things we like to do. For some of us, that means going out to a movie at a theater.
We’re vaccinating more and more people every day, and eventually, we’re going to hit what’s known as “herd immunity.” That means enough of us will be immune that the rest of us don’t really have to worry about it anymore.
When that day comes, there’s going to be a surge of leisure activities. People are going to go to ball games and book cruises. They’re going to go out to dinner or grab a happy hour drink with friends. They’re going to go see a lot of movies.
And when’s the best time to buy a stock? When everyone else is afraid to own it. So, a couple of weeks ago, I started thinking it might be a really smart move to buy some AMC shares.
Really wish I’d made that move because I’d have cashed out a 10x return last week. But I didn’t pull the trigger, and now I’ll wait until the shares get back down to a better level.
But you see what I’m getting at here, right? There was actually some method to the madness that shook markets the past few weeks.
They weren’t just picking any stock that was sold short. They were picking stocks that had some fundamental value to them.
Granted, they drove them well beyond that value in the frenzied rally, but they did actually pick some decent stocks.
Who Gets Hit Next?
Now, if you’re anything like the majority of the rest of the market, you’re probably scratching your head trying to figure out where Reddit will strike next.
I’m going to help you out with that today. And I’m going to do it by telling you to stop worrying about what they’re going to buy next.
It doesn’t matter. You’re a better investor than that.
You don’t buy stocks because you think other people will pay you more for them. You buy stocks because you value the company they represent and you want to own a piece.
So instead of wasting your time trying to guess which stock Reddit is going to target next, spend it examining your portfolio and rebalancing to stay in line with your long-term strategy.
Day traders like the ones on Reddit come and go with every manic market. Most of them lose out.
Long-term investors are in it forever, and they’re the ones who really win big.
So stick to your strategy, don’t chase stocks just because they’re going up, and keep coming here for the best actionable investment analysis in the market.
If you do all that, you’ll make out better than 99% of the traders on Reddit and most of the investing world as well.
And if you’re interested in learning about a company that’s also set to benefit from powerful trends like 5G (but hasn’t been targeted by Reddit and driven to astronomical levels), click here to learn about the only 5G stock you really need in your portfolio.
To your wealth,
After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter, and co-authors The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.
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