Meme Stocks’ Rollercoaster Ride Catches SEC’s Eye

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The U.S. Securities and Exchange Commission (SEC) issued a warning on Monday to the markets amid ongoing volatility in AMC, the latest stock to be whipsawed by retail investors, including those on Reddit message boards. 

Key Takeaways

  • AMC has become the latest meme stock, getting whipsawed by retail investors.
  • Amid ongoing volatility in meme stocks like AMC, the SEC warned markets it was watching and ready to take action if it detected any manipulation, misconduct or market disruptions.
  • Wall Street is also staying away, warning investors they will likely lose money playing in meme stocks.

The shares of the movie theater chain company are the latest to join the ranks of the so-called “meme stocks,”— stocks that trade more on social media hype than on fundamentals. AMC stock has risen from a low of $12.18 on May 24, to a high of $72.62 on June 2, before dropping to $37.66 the very next day.

The regulator said it is keeping an eye on the markets and will take action, if necessary.

“SEC staff continues to monitor the market in light of the ongoing volatility in certain stocks to determine if there have been any disruptions of the market, manipulative trading, or other misconduct,” an SEC spokesperson said in an emailed statement. “In addition, we will act to protect retail investors if violations of federal securities laws are found.”

The warning comes on the heels of the GameStop drama earlier this year when individual investors plotted over online message boards and effectively pooled their money to drive up the price of the stock and force hedge funds out of their short positions. The stock swung wildly up and down, forcing brokers to restrict trading on GameStop and other meme stocks, and regulators to investigate. As retail traders get in on the AMC action, the SEC is better prepared this time around. 

What makes AMC’s case more interesting is that its stock soared to an all time high of $72.62 last week after CEO Adam Aron launched a shareholder benefits program for retail investors collectively holding nearly 80% of the company’s outstanding shares as of March 11, 2021.

But the following day, AMC also announced an 11.55-million share offering that would dilute control of those very investors and warned in the filing that investors “may continue to experience extreme volatility,” and buyers of Class A stock could “incur substantial losses." The company further stated that the volatility its stock was experiencing was “unrelated” to its business. This announcement saw AMC stock price plunge nearly 48% last Thursday from the prior day’s record high. On Monday, the shares closed up again almost 15%.

It’s not just the SEC taking pre-emptive steps amid the wild ride. TD Ameritrade boosted margin requirements to 100% for trading AMC, meaning traders can only place bets with the funds they have, and put restrictions on some GameStop trading activity.  

In an interview with CNBC’s Squawk Box on Monday, Interactive Brokers founder and Chairman Thomas Peterffy also warned investors to stay away, saying that meme stocks would eventually return to their value, “which is roughly single-digit dollars, even if that."

He said that in the long run, investors who are long on such stocks would lose money.  “So, while you may try to catch a sudden drift upward as a trader, I would recommend against being long on these stocks,” Peterffy said.

And he’s not the only one on Wall Street who feels that way. Mike Hickey, an analyst at The Benchmark Company said he is concerned that AMC’s business fundamentals don’t justify its current stock valuation. Speaking to The Balance on Friday, prior to the SEC statement, Hickey said that if the AMC stock corrected, “a large number of retail investors could be devastated.” 

“We have a hold on the stock. Good luck finding a buy (rating),” he said.