A NEW GROUP OF MARKET MOVERS
1 July 2020
We saw some crazy stock market moves in the last few weeks. Here are some notable ones.
Hertz saw a drop close to 90% when they announced possible bankruptcy. Then they rose 200%, dropped 25%, septupled and roller-coastered down 75% to where we are now. It’s a boring day when Hertz “only” moves 10%.
This isn't a 10 year chart... It's 1 month!
GNC Holdings (GNC)
I’m very much a gym/fitness nut so I saw GNC’s demise coming from a mile away.
Nobody goes out of their way to buy supplements at a retail store anymore. Not to mention, the rise of fitness influencers promoting their own supplement brands online virtually killed retail supplement stores.
Yet, GNC doubled in the days after they announced chapter 11!
Now, GNC isn’t even listed on the NYSE, but on the OTC exchange as GNCIQ.
Offshore Oil Companies
Some notable names: Schlumberger Limited (SLB), Valaris (VAL), Transocean (RIG), Borr Drilling (BORR), Diamond Offshore (DO), Diamond Offshore chapter 11 version (DOFSQ), Tidewater (TDW)
I’m actually bullish on the oil and offshore oil sector as a whole. I don’t have any positions in offshore oil now, but could take some shots later down the road.
It baffled me why anyone would invest in offshore oil when the Russia-Saudi oil price war began. Offshore oil businesses do not have strong enough balance sheets to thrive (or survive) when oil prices are low. Many of them couldn’t meet their interest payments so it was only a matter of time before one of them went under.
Sure enough, Diamond Offshore bit the dust and filed for chapter 11 bankruptcy a month later. Diamond plans on restructuring and making their debt burden lighter so they can emerge as a leaner, more efficient company (hopefully before oil takes off).
It wouldn’t surprise me to see other offshore oil companies file for chapter 11. In the long-run, it’ll make these businesses more efficient. In the short-term, things are likely to get ugly (especially if oil tumbles again).
Despite this, Valaris, Transocean, and Borr all saw a week where they tripled their share price!
Who’s buying this sh!t?
It makes no sense why anyone would invest in borderline bankrupt companies. Even if I were a trader, it just doesn’t seem smart to invest in something that can drop 70% the next day.
So who’s bidding up these prices?
It certainly isn’t large hedge funds. In the case of Hertz, billionaire Carl Icahn sold his 39% stake, causing him to lose over $1.8 billion.
Some of the buying could be from smaller quants.
But likely, and this is what most people believe as well, the buying is coming from a bunch of new retail investors, affectionately called “Robinhood traders”.
With the popularity of Robinhood and other easy-to-access, no commission brokers rising, more people have access to the stock market than any time in history.
While one of these traders doesn’t have enough money to move a stock, thousands of them all trying to outbid each other can.
But why would Robinhood traders be interested in garbage companies?
I think the answer is simply: their flawed, new-investor mindset.
Quiz! Which stock would you buy?
When I talk to my friends who aren’t in the markets what stock they would buy, a good number of them said Hertz (facepalm)! When I asked them why, they said something along the lines of, “it crashed the most so I feel like it will go up soon.”
I understand the logic of “buy low sell high”, but it seems too many people are taking that phrase too literally.
Another flawed idea new investors have is to simply buy anything with a cheap stock price.
I believe these two reasons are enough to justify the crazy volatility.
Funny thing is, this isn’t anything new. Every bubble has seen new investors, short-term thinking, and extreme volatility.
With the advent of the internet, the major thing that’s changed is the magnitude.