GameStop and AMC Entertainment shares rocket again

The revival in the GameStop Corp Class A (NYSE:GME) trading frenzy showed no signs of fading today as more investors opted to follow the crowd rather than their appetite for risk.

Shares in the video game retailer rose 74% on Monday to $30.45, but had traded as high as $38.20 before easing back during the afternoon. They jumped again in after-hours trading to end Monday just shy of $38, but just minutes into Tuesday's session, the stock had doubled again to over $64 before quickly pulling back to under $50.

The spark is believed to have been the first social media post in three years by day trader Keith Hill, who shot to fame during the original meme-stock frenzy under the moniker “Roaring Kitty”.

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Fuelled by discussions in internet chat rooms, retail investors were behind a wave of buying that forced hedge funds into covering their positions on several heavily shorted stocks. Shorting refers to the practice of selling stock that you think will fall, with a view to buying back at a lower price.

GameStop shares were worth less than $5 at the start of 2021, but within a few weeks had surged to an intraday peak of $120 for a gain of almost 2,500%. The highest the shares closed a trading day at was just under $87. They returned to a low of $10 three weeks ago.

A so-called 4-for-1 stock split in July 2022 meant that shareholders received three new shares for every one share they owned. This reduced the share price to a quarter of what it was before, although the value of holdings would remain the same as shareholders would be own more shares. This is why the previous record high of $480 shows up on the latest stock charts as $120. 

You can read about the original GameStop boom in this article.

Source: TradingView. Past performance is not a guide to future performance.

Other heavily shorted stocks during that time also saw sizeable gains in this latest wave of buying, including cinema group AMC Entertainment Holdings Inc Class A (NYSE:AMC).

Their stock was up 78% during regular trading Monday but moved higher still after hours. They more than doubled in early deals Tuesday to almost $12 from just over $5 at last night's close.

Shares in the debt-laden company collapsed by over 80% last summer amid controversy around the conversion of preferred stock units - APE shares - into common stock and a subsequent stock split.

This week’s surge in buying comes despite no evidence of any change in the trading performance or approach of the companies concerned.

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It appears to have been driven by fear of missing out, or FOMO, and the hope that history repeats itself, with the potential for gains on the way up. But the stock market isn’t a casino, and investors are in danger of some painful losses by following the crowd.

Lee Wild, head of equity strategy at interactive investor, said: “Investing in fast-moving shares is always a high-risk pursuit. But the risk is magnified many times over when there is no obvious investment rationale for buying the stock.

“While some might get lucky with their timing and make money buying and selling so-called meme stocks, history tells us plenty of people suffer significant losses during these bursts of trading activity. Investors would be wise to tread very carefully.”