Interactive Brokers founder and chairman Thomas Peterffy on Monday issued a warning to investors betting against so-called meme stocks like AMC Entertainment.
“It is extremely tempting to short these stocks, but unless you have huge liquid resources, please try to resist the temptation because 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,” the online brokerage pioneer said in an interview on CNBC’s “Squawk Box.”
Shares of AMC soared more than 20% on Monday after rising 83% last week alone despite declines on Thursday and Friday. The stock has gained about 2,500% in 2021.
“On the long term, stocks always approach their fundamental values, which in this case is much, much lower,” Peterffy said, acknowledging that’s why short-sellers see an opportunity in certain stocks such as AMC that have soared in price after becoming favored by Reddit traders.
Shorting a stock is a bearish strategy in which an investor borrows shares and then promptly sell them, expecting the price to fall. When that happens, the short-seller buys back the stock at its lower level and returns the borrowed number of shares, profiting off the difference. If the opposite transpires, a short may try to limit their losses by buying back the stock at higher prices.
Peterffy’s comments after a wild week of trading in AMC and a few other companies such as Bed Bath & Beyond and BlackBerry. While GameStop attracted the most attention in the epic WallStreetBets’ short squeeze in January, when the Reddit-driven trading frenzy first took hold, AMC has seen its profile — and share price — rise in recent weeks.
The movie theater chain, which was hit hard by the Covid pandemic, has taken advantage of the retail investor enthusiasm by selling additional shares to raise money. AMC also has launched initiatives targeted at its retail investors, such as exclusive screenings.
Despite AMC’s efforts, Peterffy said the company still has a challenging road ahead to justify its valuation and suggested long investors who want to buy and hold the stock should stay away, too.
“If you’re willing to sit there and hold a stock at $200, $300, $400 a share that keeps making no money … it’s impossible that these prices can hold up at that level because more and more people will be short it,” he said.
“Eventually these stocks will go back to their value which is roughly single-digit dollars, even if that,” he added. “On the long run, the longs will lose their money, So while you may try to catch a sudden drift upward as a trader, I would recommend against being long on these stocks.”