As Markets Rebound, This Stock Proves Retail Investors' Hopes Are Alive and Well

Stocks continued on Tuesday to try to claw back some of the ground they lost earlier in 2022. Investors appeared to be of mixed opinions about the likely trajectory of the economy, interest rates, and inflation, but after the Dow Jones Industrial Average (^DJI 0.06%), S&P 500 (^GSPC -0.22%), and Nasdaq Composite (^IXIC -0.52%) spent some of the morning lower, they all finished the day with gains of nearly 1%.

Data source: Yahoo! Finance.

Those gains for the major market benchmarks were nice, but they were tiny compared to the move made by one company Tuesday. Below, we'll look more closely at why Redbox Entertainment (RDBX) is back on the radar screens of short-term traders, and why it's a sign that retail traders are still looking to take advantage of stock supply constraints to wreak havoc on those investing based on longer-term fundamentals.

The move higher for Redbox

Redbox's gains over the past three weeks have been monumental. As recently as May 18, the company behind the once-ubiquitous DVD rental kiosks was trading below $3 per share. Tuesday's 28% jump took the share price to $8.55, triple what it was less than a month ago.

Image source: Getty Images.

If you only casually looked at Redbox, some aspects of its financial situation might seem to justify its surge. As part of its merger with a SPAC to come public, some of the pre-merger losses Redbox incurred are showing up as positive adjustments to net income. As a result, some financial services show that Redbox has a massive profit that leaves it with a single-digit price-to-earnings ratio.

It's still trading far below the $27 per share that it reached in late October in the immediate aftermath of its SPAC merger. It's even below the $10 per share price that initial investors in the SPAC paid before the deal was announced. But for a business in Redbox's condition, the recent tripling of the spare price looks suspect.

2 reasons for concern

One issue is that Redbox continued to lose money in the first quarter. Its total net losses amounted to $41 million, and although some of those losses were attributable to a non-controlling interest, Redbox still posted a $0.11 per share net loss attributable to regular shareholders.

Even worse, Redbox agreed to a merger at a value far below its current share price. Chicken Soup for the Soul Entertainment somehow convinced Redbox to agree to a deal under which its shareholders will receive just 0.087 shares of Chicken Soup stock for every Redbox share they own. With Chicken Soup priced below $7 per share, Redbox shareholders could get less than $0.60 in value for every Redbox share they own right now -- a haircut of more than 90% from Tuesday's closing price.

What has to happen

For Redbox shareholders to end up ahead, the merger with Chicken Soup would have to get called off. Moreover, the business would have to start becoming profitable again -- or at the very least, retail investors would have to bid Redbox shares up to such high levels that the DVD rental company could issue a secondary stock offering to raise cash to build up value.

The story of AMC Entertainment Holdings (AMC -2.01%) shows that such moves can work -- at least, for a while. With Redbox, they seem like a long shot -- but if nothing else, they show that retail investors still have a few tricks up their sleeves.