What happened

Shares of food-delivery service Waitr Holdings (NASDAQ:WTRH) were absolutely on fire Thursday, and no one seems to know why. As of 12:30 p.m. EDT today, the stock was up a whopping 19%. A lot of things can move a stock, including press releases, analyst reports, corporate presentations, and even less-fundamental things like short interest in the stock. But none of these factors appear to be present today.

The outsize movement in Waitr Holdings stock today reminds me of how euphoric many investors are with returns in 2020 and how quick some are to buy stock in hot names. Optimism is so high that investors are using a lot of leverage to maximize returns, and that's a problem.

A hand plots an arrow higher on a graph.

Image source: Getty Images.

So what

One possible explanation for Waitr stock going up is the annual Consumer/Media/Entertainment Conference now taking place in New York. TheFly.com lists Waitr as a topic for the conference. Without insider access it's impossible to know for sure, but Waitr is just one of many listed stocks, and it's hard to imagine that something said there could move the stock this much.

Earlier this year, Waitr Holdings entered the retail-investor spotlight because of what it does: food delivery. This was seen as a good coronavirus play since the company looked poised to benefit from stay-at-home orders. Indeed, revenue was up 5.4% year over year in the first half of 2020. And it reported net income of $8.6 million for that time span, something big competitors like Grubhub have failed to do.

But on Wednesday, Yahoo! Finance published a study in conjunction with The Harris Poll showing 43% of retail investors are trying to get higher returns by using leverage. These investors are using a combination of options and margin accounts. That's a lot of leverage and necessarily implies a short-term investing horizon. 

Small-cap stocks like Waitr Holdings are easy to manipulate; it doesn't take many investors jumping on board to move the needle. And with investors arming themselves with liquidity via margin, it's not surprising to see stocks like this move on zero news. Fear of missing out can fuel run-ups like this.

WTRH Chart

WTRH data by YCharts

Now what

"Only when the tide goes out do you discover who's been swimming naked," as famed investor Warren Buffett once said. As the tide regularly goes out, so too does the market regularly crash. Using margin to play hot names like Waitr Holdings feels like fun when you're winning, but it leaves you unprepared for what inevitably comes.

I don't mean to say that Waitr Holdings is a bad long-term investment; that's a separate discussion. Indeed, I applaud the company's profitability despite the small size of its operations. But the stock clearly isn't going up for that reason today. It's going up as traders speculate on it in the short term, likely using margin, which means it could come crashing back down just as fast without warning.