Meme's the Word as the Kitty Roars, But Are Apes Together Strong?

It happened on Sunday night. The "X" (formerly Twitter) account known as Roaring Kitty posted on the social media site for the first time since June 18th, 2021. Traders will of course, remember Roaring Kitty as perhaps the most prominent member or even leader of an entire community of retail investors. Those traders would ultimately become known as "meme traders" and the stocks they traded would be known as "meme stocks." 

Kitty's post on Sunday night, was of course, meme of a man or gamer sitting up in a chair as if starting to pay more attention.

Late in the pre-opening session on Monday morning, GameStop GME, which was at the center of the meme stock trading craze in 2020/2021, took off. I have seen GME trading at a 40% premium to its Friday afternoon closing price of $17.46. Fellow former meme-trading stock AMC Entertainment AMC closed at just $2.94 on Friday evening. That name was up about 13% in early trading.

Readers may remember that "Roaring Kitty" in 2021 was a man whose legal name was Keith Gill, who was a former marketer for Massachusetts Mutual Life Insurance, who used a different name that cannot be mentioned here at a family publication at Redditt and used social media to communicate with other retail traders. 

The traders seemed to work together to cheer each other on and drive stocks higher of companies with struggling businesses and elevated short interests. This badly damaged - in some cases - hedge funds that had bet heavily against those firms, while mistakenly believing that there was no need to actually "hedge" those positions, despite the adjective that is used to describe these funds in the aggregate.

Earnings

On March 26th, GameStop reported an adjusted EPS of $0.22, missing badly on revenue of $1.79B. The revenue print not only fell short of consensus, but also reflected a year over year contraction of $19.7%. The firm is expected to report its Q1 earnings during the first week of June. Expectations are currently for an adjusted EPS of $-0.09 on revenue of $1.05B. That would be a year over year contraction in revenue generation of another 11.5%. Last we heard from the firm, they were in cost cutting mode and that meant they were reducing headcount.

For that last quarter reported, operating cash flow printed at $-11M and free cash flow at $-18.7M. However, the balance sheet and cash positions were much stronger than someone just casually watching the firm from afar might think. Close to no debt on the balance sheet, which we like. 

This firm, believe it or not, can burn cash for a little while as they figure out what's next. That indeed has been the hard part of running this company as several transitions from a gamer's paradise into something different have sputtered.

The most important item here is that as of two weeks ago, 21% of the entire float was still held in short positions. What that means is that Roaring Kitty or someone like Roaring Kitty could perhaps cause a stampede that would again damage short sellers if they had not learned how to actually hedge these bets. 

The humiliation of Melvin Capital, which closed in 2022, comes to mind as that fund was brought to its knees by a combination of meme traders taking GameStop shares much higher and the firm's own amateurish, rookie league style of trade.

Apes Together Strong?

To invest in either GME or AMC? No, go see the new "Planet of the Apes" movie in an actual theater. Haven't been in one of those since pre-pandemic times. AMC Holdings is not as fundamentally sound as GameStop. 

On April 26th, AMC released the firm's first quarter results. The firm posted a GAAP EPS of $-0.62 on revenue of $951.5M. As lousy as these numbers look, they both beat Wall Street, while the sales print was down just small from the year ago comp.

For that quarter, AMC posted operating cash flow of $-188.3M and free cash flow of $-238.8M. The balance sheet is in pretty awful shape, with a cash position of $624.2M, long-term debt of $4.518B and a current ratio of 0.61. For those that do not know, current ratios are considered potentially problematic once they drop below an even 1.0 and this does not even come close to passing muster. 

As of April 30th, a rough 20% of AMC's float was held in short positions, so this one could serve as kindling for the herding of the masses, or apes as they liked to be known back in 2021 or so.

My Thoughts

As an investment, I would not tough either one of these names, on the long or short side. Right now. 

AMC has a business model that no longer seems to work and some really sloppy fundamentals. 

GME actually has a balance sheet to be proud of and can take its time deciding what to do and where to go. Video game consoles aren't as much of a business since games can be downloaded over the internet. I would not give up on GME, I just want to know more before I would consider jumping aboard.

As for short-term trading, I think both GME and AMC are fair game. Just don't get caught holding anything for too long or biting off a large chunk that one can chew. On what might otherwise be a slow Monday, this might just be where traders can hit some singles and doubles.

At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.