Advice on best ways to handle 3 stocks

CAN you make money going against the Wall Street Bets crowd? Yes, but you can also lose a lot — and fast.

Short anatomy

Short sellers seller borrow shares and immediately sell them, hoping the price will fall. Eventually, they must buy shares to replace the shares that were borrowed, which is called “covering.” If the price falls before they cover, they profit.

They have bought low and sold high, only in reverse order.

Suppose your neighbor, Lucky, shorted 100 shares of GameStop on Jan. 29 at $360 a share. He covered on Feb. 17 at $50 a share. His profit was $310 a share, or $31,000, in two and a half weeks.

Easy money? Not really, because trades like these involve tremendous risk.

Suppose you were jealous of Lucky’s success and decided to short GameStop the day after he covered. You shorted 500 shares at $44, receiving $22,000 in proceeds.

The stock meandered for about a week, then on Feb. 25 shot up to $184.68 intraday. Panicked, you covered at $170. Now you have a $63,000 loss. Financial ruin in seven days.

Here are my recommendations on three stocks that are especially popular with the denizens of Wallstreetbets. Be sure to read the cautions that follow.

GameStop

GameStop’s business model — selling video games and video game equipment in stores — appears broken, as witnessed by three major loss years in a row.

Optimists say that Ryan Cohen, former CEO of the pet-supply company Chewy, will be GameStop’s savior. Cohen owns a big chunk of GameStop’s shares and is pushing it toward an online-selling model.

Suppose Cohen works a miracle and GameStop matches its best year ever, 2016. That year, profits were $3.78 a share. Apply a generous multiple of 20, and you get a stock price around $76.

Bear in mind, the stock traded between $4 and $5 for most of 2020, before the Wall Street Bets crowd pushed it to the moon.

I would short the stock at any price above $76 but be prepared to cover it quickly if necessary.

AMC

AMC is the world’s biggest movie theater chain and perhaps — just perhaps — crowds will return to the movies when the pandemic is over. But AMC’s troubles precede the pandemic: It lost money in three of the past four years.

The stock was peacefully vacillating between $2 and $5 for most of 2020 before the Wall Street Bets crowd got hold of it and pushed it briefly (very briefly) to $20. At this writing it’s at about $8.

I would sell it short at $12 or more.

Tesla

Tesla is doing a lot better than GameStop or AMC, and it was a fad stock before Wallstreetbets became famous (or infamous). The online forum has given its engine an afterburner.

In the coronavirus bear market last March, Tesla shares fell to about $72. Today, just under a year later, they stand at $675, which is 1079 times recent earnings and 163 times the earnings analysts expect in the next year.

No question that CEO Elon Musk is an exciting, innovative guy. But that valuation in my judgment is unsustainable.