What happened
Shares of Torchlight Energy Resources (TRCH) fell as much as 25% today. AMC Entertainment's (AMC 0.33%) stock swung between a loss of 8% and gain of 5%. And Express (EXPR) shares were higher by as much as 15% at one point during the day, though they ended with a gain of closer to 11%.
What do an oil driller, movie theater operator, and clothing retailer have in common? Reddit message boards.
Image source: Getty Images.
Here's the thing, each of these companies has a story to tell. But what's happening with the share prices today has little to do with those stories. Rampant speculation has been the driving force and that's very different from investing. There's a reason why the investing classic The Intelligent Investor by value investing icon Benjamin Graham (the man who helped train Warren Buffett) started by distinguishing between speculation and investing. This trio of stocks is a great example.
So what
Torchlight Energy Resources is in the process of merging with a Canadian company called Metamaterial. It's an incredibly complex deal that's sole purpose is to get Metamaterial a U.S. listing. In fact, the company plans to jettison its energy operations after the deal is consummated. Yes, the process is drawing near its end, but it is far from over (the energy sale won't take place until after the merger) and Torchlight will be an entirely different company once this is complete. There are a lot of moving parts here and most investors would be better off watching from the sidelines. But Reddit investors have caused wild swings in the stock with speculators hoping to make a quick buck as the complex merger process unfolds. Note that it has been beset by delays, the most recent of which was announced on June 21.
AMC Entertainment has been on the Reddit roller coaster for a lot longer. In fact, the stock gains driven by the message board have probably helped to save the company from its financial difficulties, allowing management to sell massive amounts of new stock. Normally such dilutive stock sales would upset Wall Street, but not when Reddit traders think someone else will buy the stock at a higher price. There is, perhaps, no more damning statement of the stock than this bolded text from the company's own SEC filing related to its latest issuance: "Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment." Investors should listen to AMC on this one, letting the speculators do as they see fit.
Express is practically a tame stock by comparison, only up around 490% so far this year. But don't let that fool you, there's plenty of craziness going on here. First-quarter 2021 sales were up 64% compared to the first quarter of 2020, which is a massive improvement. But the base year was impacted by the coronavirus pandemic. If you compare the first quarter of 2021 to the first quarter of 2019, sales were down 23%. That's awful, and an investor might rightly wonder why the stock is trading at a higher level today than it did at the start of 2019. A speculator wouldn't care because the hype is all that matters.
Now what
If you are an investor you should avoid anything even slightly related to the Reddit madness that has engulfed the stock market. That said, speculation is, has been, and always will be a part of Wall Street. Just remember that someone will end up being the last person out the door when this all comes crashing down, and the only way to make sure that person isn't you is to watch stocks like Torchlight, AMC, and Express from the sidelines.
