Reddit investors are at it again! AMC Entertainment (NYSE: AMC) is surging to an eye-watering high this morning. AMC’s stock price is up 266% over the past two weeks and 1,700% over the past year. There seems to be no end to the Reddit-short squeeze phenomenon.
Could a local rival like Cineplex (TSX: CGX) be next? And how long will these so-called meme stocks keep surging? Here’s a closer look.
AMC stock short squeeze
A quick refresher: a short squeeze is a technique used by investors to push a stock up. Here’s how it works. You find a company that is being heavily shorted, or bet against. This means institutional investors have borrowed the stock and sold it at market price. They hope to buy the stock back at a later date, closing their trade. If the price is lower, they make profits.
However, if the price surges higher, the short-seller is squeezed. Eventually, their capacity to bear losses is depleted, and they have to buy the stock to close the trade at a much higher price than they anticipated. This purchase pushes the stock price even higher, creating a cycle.
Reddit users have been targeting stocks that are being aggressively bet against. Their most successful target is AMC stock, which has a short interest ratio above 20%.
Could Cineplex be next?
AMC’s Canadian rival Cineplex seems like a natural target. The company suffered a significant drop last year due to the crisis. It now faces a rebound in ticket sales and activity, just like AMC.
However, Cineplex lacks one key ingredient to make it a worthy meme stock: short interest. At the time of writing, only 824,700 shares are being used by short-sellers to bet against the company. That means the short interest is roughly 1%. That’s not nearly enough to trigger a short-squeeze strategy.
Another meme stock?
Perhaps a better target is Village Farms International (TSX:VFF)(NASDAQ: VFF). The fact that this isn’t a cinema chain is irrelevant. Short-sellers have borrowed roughly one in five, or 20%, of the company’s outstanding shares to bet against it. That level of short interest is on par with AMC stock and is far more important to Reddit users.
There’s no way to say if this stock will actually catch the attention of Reddit’s enthusiastic crowd of amateur investors. But the short interest and cannabis angle makes this stock meme-worthy, in my opinion. Adding a small, speculative portion of your portfolio to this relatively undervalued stock may not be such a bad idea.
Bottom line
Short-squeeze strategies are risky, volatile, and unpredictable. You’re betting on crowd psychology with very few ground rules. However, AMC stock’s stunning performance this year makes it clear that this strategy is a thrilling way to make speculative profits.
If you’re looking to speculate with a little spare cash, Village Farms could be a better candidate than Cineplex. Good luck and stay safe!
