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Why Torchlight Energy and AST SpaceMobile Popped Today -- but AMC Stock Dropped

By Rich Smith – Jun 16, 2021 at 1:11PM

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Reddit and WallStreetBets are in effect.

What happened

Shares of Torchlight Energy Resources (TRCH) and AST SpaceMobile (ASTS -4.32%), two meme stocks recently favored by the Reddit crowd, are going "to the moon" today, rising 18.2% and 15.1%, respectively, as of noon EDT. In contrast, sentiment on AMC Entertainment Holdings (AMC -7.43%) stock is shifting into reverse, and the stock is down 9.3%.

Reddit has struck again.

Bear and bull face off under green and red stock arrows

Image source: Getty Images.

So what

Let's start with the bad news today. AMC stock is suffering from a Barron's report last night that pointed out that at the same time as the value of AMC's debt is rising, its stock price is falling. On the one hand, this sounds like good news -- AMC's bonds are trading close to "par," or face value, indicating that investors are pretty confident that given enough time, AMC will repair its finances and pay back its debt.  

The problem is how AMC plans to repair its finances, and the working theory appears to be: by selling a lot of shares, raising a lot of cash, and diluting its shareholders to the max. As credit risk agency CreditSights has commented: "sizable equity issuance is the only real avenue for AMC to right-size its over-extended capital structure." That's bad news for shareholders, and it's why AMC stock is falling.

At the same time, AST SpaceMobile stock is surging in response to what calls "a user in Reddit's Wallstreetbets forum recommend[ing] the name." You may recall AST as the space special purpose acquisition company I panned in a column earlier this year for basing its much-hyped IPO on "technology [that] is highly proprietary, and exactly how it works cannot be disclosed," supported by a fleet of communications satellites that haven't even been built yet, much less launched.  

Yet Redditors seem starstruck by the company's promise to turn every cellphone on Earth into a de facto satellite phone -- and its 5.5% short interest that opens the possibility of a short squeeze.  

Now what

And speaking of short squeezes, recent Reddit fave Torchlight is benefiting from momentum investors predicting that "80 million shorts" will soon be caught in a short squeeze after the company issues "a special dividend of Series A" preferred stock on June 24.  

But to be honest, I'm not sure about the math on that one, either. According to the latest data from S&P Global Market Intelligence, there are in fact only 15.4 million shares of stock sold short on Torchlight at present. Granted, that's still a lot -- more than 10% of all shares outstanding. But if the folks pushing Torchlight as a short squeeze play got their most important number so wrong from the get-go, I wonder: Doesn't that call the whole short squeeze thesis into question?

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$7.10 (-7.43%) $0.57
Torchlight Energy Resources, Inc. Stock Quote
Torchlight Energy Resources, Inc.
AST SpaceMobile, Inc. Stock Quote
AST SpaceMobile, Inc.
$7.09 (-4.32%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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