What happened
Shares of meme stocks AMC Entertainment Holdings (AMC 9.72%), SmileDirectClub (SDC 13.64%), and Sundial Growers (SNDL 1.31%) were declining today, down 9.5%, 3.6%, and 1.9%, respectively, as of 3:40 p.m. ET.
There wasn't any news regarding these meme stocks in particular today; however, potential bad news at another meme stock appeared to cause a sell-off in other favorites of the WallStreetBets crowd.
So what
Fellow meme stock Bed Bath & Beyond (BBBY) had plunged about 23% as of 3:40 p.m. ET, following a filing last night by major shareholder Ryan Cohen. Cohen filed a form 144 revealing his intention to sell 8 million shares of stock and another 1.45 million shares through the sale of call options purchased earlier this year.
Keep in mind, Cohen is still sitting on some handsome profits, even with today's drop. Bed Bath & Beyond shares had surged some 300% in the first half of August, as meme traders appear to be reentering the market amid falling inflation and beaten-down stock prices.
It's a bit odd that a home goods retailer is lumped in with AMC, a movie theater operator; SmileDirectClub, which sells do-it-yourself dental aligners; and Sundial Growers, a Canadian cannabis grower that has recently pivoted to selling alcohol as well. However, these stocks are all a part of a group that rose to fame in 2021 amid the meme stock craze. That occurred when retail traders on online forums such as Reddit's WallStreetBets identified highly shorted companies that could be squeezed with enough coordinated buying power.
Therefore, those technical factors have caused these stocks to be grouped together and trade almost as their own sector. Like Bed Bath & Beyond, these three stocks had also surged month to date:
AMC Month to Date Total Returns (Daily) data by YCharts
Why would Cohen's filing have rattled these other stocks? Well, Cohen is also the chairman of the original meme stock, GameStop, having invested in the beaten-down game retailer with an eye toward transforming the business. Cohen also held other meme stocks like Bed Bath & and Beyond, as his holdings amounted to nearly 12% of the home goods retailer's total outstanding shares.
Seeing a meme stock believer file to cash out his stake may have signaled to other investors that Bed Bath & and Beyond's price had become too frothy, even for Cohen. That could signal that other meme stocks, whose shares have run as well, may have gone too far, too fast -- although none of these stocks had rallied the way Bed Bath & and Beyond did earlier this month.
Now what
Meme stocks can make exciting moves in the short term, as the first half of August showed. Yet as today showed, they can also plunge lower rather quickly. After today's drop, where does each stock stand?
AMC seems risky at this moment ahead of its "APE" preferred stock special dividend to shareholders, which seems to be a harbinger of an upcoming dilutive equity raise. Right now, it's unclear how much AMC seeks to raise, and at what price APE shares will trade. Additionally, movie theater peer Cineworld Group saw its stock plunge more than 50% yesterday, after admitting it may have to undergo a highly dilutive stock raise to fend off bankruptcy amid a disappointing late summer film slate.
Meanwhile, SmileDirectClub could also encounter a liquidity problem later this year and may have to raise cash, as it recently reported disappointing results and a disappointing 2022 outlook. SmileDirect burned through $112 million in cash through the first half of the year, and only has $158 million in cash left against $790 million in debt. Yet on the bright side, the company's new artificial-intelligence-based phone app, which could greatly streamline its customer acquisition costs, is set to be released later this year or early next year.
Sundial is actually the least risky of the bunch, which may seem counterintuitive, given its status as a tiny Canadian cannabis grower and retailer. The company reported strong revenue growth last quarter, but much of that came from its acquisition of Alcanna, the liquor store retailer, which closed in March.
Still, Alcanna is profitable, helping to offset continued losses in the cannabis segment, and Sundial has roughly $363 million in unrestricted cash and no debt. Meanwhile, the company has made numerous investments in other cannabis companies in the form of debt and convertible debt, both independently and through a joint venture, to which it has contributed $480 million. Given that Sundial trades well below its book value and has no debt, it looks rather cheap -- although investors don't really know what the business will look like in the future. That could be why it was the meme stock that recovered the most after today's early morning drop.
