From buying shares in bankrupt firms to people going bonkers over bitcoin, we look at some curious events from an investment perspective.
Later this month will mark what was the beginning of the coronavirus-inspired slide in global markets. The last year has been a rollercoaster ride emotionally, socially, economically – and from a stock-market perspective too.
interactive investor, the UK’s second-largest DIY investment platform, looks at some of the more curious events from an investment perspective – from people buying shares in bankrupt companies, curious cases of mistaken identity, and people going bonkers over bitcoin. More recently, there has been the Reddit GameStop (NYSE:GME) short squeeze story.
Richard Hunter, Head of Markets, interactive investor, says: “In a year which saw the quickest crash – and recovery – in US markets, negative oil price futures and a seemingly unlimited virtual-money printing press, perhaps these events are not so outlandish after all.
“Even so, these events underline the importance of adequate individual research for investment decisions. They also reiterate the comments of legendary economist John Maynard Keynes that ‘the markets can remain irrational longer than you can remain solvent’.”
The following observations are from Tom Bailey, ETF Specialist at interactive investor.
People buying shares in bankrupt companies
While GameStop has grabbed headlines, the first big Wall Street Bets mischief to hit the news during the pandemic was Hertz (NYSE:HTZ), the car rental company. With the world going into lockdown in 2020, there was not very much demand for renting cars. At the end of May, the company filed for bankruptcy and by June the company’s stock had fallen off a cliff, as is supposed to happen in bankruptcy.
However, retail traders from forums such as WallStreetBets decided to start buying the company, sending its price soaring – something that doesn’t usually happen when a company is in bankruptcy. The company, understandably, took advantage of this unusual situation and decided to issue around $1 billion worth of new stock. Eventually, however, the US Securities and Exchange Commission (SEC) decided to put a stop to this.
Mistaken identity on the market
With markets in something of a buying frenzy in 2020 and in 2021 to date, it is perhaps not surprising that there have been reports of some investors inadvertently buying shares in the wrong company due to confusion over names.
In April, when everyone started to use Zoom (NASDAQ:ZM) for their work video calls, many investors decided to buy shares in the company. However, reportedly, many ended up buying a company called Zoom Technologies, which then had “Zoom” as its ticker. Unfortunately, this was actually a tiny Chinese company that makes mobile phone parts and had nothing to do with video calls. The accidental purchase pushed up the shares by 1,800% before the SEC stepped in [interactive investor does not and did not have this stock on its platform].
Another case of mistaken identity involved the messenger app Signal, an increasingly popular rival to WhatsApp. When Elon Musk tweeted that he was a fan of the app, investors reportedly scrambled to buy shares in a company called Signal Advance Inc [this company is not and was not available on the interactive investor platform].
Unfortunately, this company had nothing to do with the messaging app, instead being a biomedical company based in Texas. Nevertheless, the hype saw its share price soar by several thousand per cent. The strangest thing, however, is that even as articles were being published making it very clear that the company had nothing to do with messenger app, its price still continued to go up. It was as if investors knew it wasn’t the messenger app Signal but didn’t care. Even today, its share price is around 300% higher than it was before the saga.
Elon Musk moves markets
In fact, a lot of weird things in the market this year have some relation to Elon Musk. Tesla (NASDAQ:TSLA), the company Musk is CEO of, had a fantastic 2020. However, one strange side-effect of this seems to be that Musk now has the ability to move markets by simply tweeting about his like of a certain company, asset or product.
So, for example, when Musk tweeted “I kinda love Etsy (NASDAQ:ETSY),” the e-commerce company saw its share price rise by around 10%.
More dramatically, Musk has made several tweets in relation to the cryptocurrency Dogecoin, along with several other celebrities. This helped push the coins price up by around 1,000% over several days in February.
Similarly, the billionaire’s tweeting about the GameStop mania is seen by many as further fuelling buying of the stock. As one financial commentator has joked, “the way finance works now is that things are valuable not based on their cash flows but on their proximity to Elon Musk”.
Companies buying bitcoin
Another weird moment also includes Musk. As many will be aware, bitcoin has been on a tear in recent months, reaching several new all-time highs (not that past performance is any guide to the future).
But one strange phenomenon has been companies very much not in the cryptocurrency space buying bitcoin with their corporate cash. One of the most notable examples was MicroStrategy (NASDAQ:MSTR), a mobile software and cloud-based services company founded in the 1980s. The company announced last year that it was buying bitcoin due to it being a “dependable store of value.” The company said its decision was “proactive management of our balance sheet.”
As highly unusual as that was, it was welcomed by markets and helped push the company’s share price up several fold. This makes some sense: if the company holds a lot of bitcoin on its balance sheet and bitcoin has gone up a lot, the value of the company, measured by its balance sheet, has also gone up.
But it is still rather strange. The company’s core competency is not the ability of its CFO to use the company’s cash to make bets on highly risky assets. If anything, you’d expect such behaviour to raise a red flag to markets. However, one of the world’s most valuable companies has now done the same. In February, Tesla announced it had also bought bitcoin, worth a billion and a half dollars.
Everyone should now be familiar with this story. GameStop is a company that sells video games in physical shops. That’s not a great business model these days, particularly during Covid-19. The price of the company’s shares had initially reflected that.
However, in 2020 activist investor Ryan Cohen bought a big stake in the company. Cohen has had past successes building online businesses and so in the minds of some, GameStop was due a turnaround. This was a popular view on the online Reddit forum WallStreetBets and users started buying stocks in the company or option calls on the shares.
This eventually snowballed into prices rising by several thousand per cent. And it was not without consequences: hedge funds that had shorted the stock started to face potentially big losses, volatility spread to the rest of the market with major indices seeing declines, US politicians from left and right spoke out and some called for increased regulation. All because a few thousand retailers clubbed together to buy a stock at the same time.
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