Meme stock crashes
Billionaire happy, small investor angry
By Jan Ganger
08/22/2022, 6:58 p.m
The rapid rise in the share price of the home decorator Bed Bath & Beyond ends abruptly. The billionaire who fueled the hype withdraws in good time and makes a good buck. An army of amateur traders, on the other hand, sinks a lot of money.
Ryan Cohen should no longer be really popular with stock market gamblers. The investor was hailed by a community of fans after he bought into ailing home decorator Bed Bath & Beyond and hyped the stock over the summer. The course raced to dizzying heights – until Cohen announced that he had sold all his shares. With that, the party suddenly came to an end and the price plummeted.
That sucked for an army of small investors who had cheered themselves on by buying stocks to drive the price higher and higher. That went fine for a few weeks. At the beginning of July, Bed Bath & Beyond was worth $4.38 a share, but last week the price shot up to $30 before falling to around $11.
A key reason for the recent price rise: Cohen’s investment vehicle RC Ventures announced on Tuesday in the midst of the rally to the SEC that it had increased its stake in Bed Bath & Beyond to almost twelve percent since its entry in January. In addition, Cohen bought so-called call options on the stock. With these bets, he secured the right to buy shares for up to $80 through January next year. This triggered cheers in the relevant forums, and the price rose sharply.
However, on the same day, Cohen’s company said it plans to divest all of the retailer’s stock in the next 90 days. In the course of trading, the course crumbled, but on Wednesday it went back up sharply. The price climbed to $30, but then collapsed to just under $23 by the close of trading.
The crash continued on Thursday. The bad mood of some hobby gamblers is likely to have worsened when Cohen’s investment vehicle announced that it had sold all shares and call options on Tuesday and Wednesday. According to calculations by the US finance portal Bloomberg, Cohen earned around 68 million dollars from the deals.
Bad quarterly figures
This shows the immense risks of so-called meme stocks. Because at some point all hype is over. The principle: Hobby traders meet in Internet forums to beat the price up by buying shares together. The gamblers increase their clout if they bet on special stocks: securities in which hedge funds bet on falling prices. The goal is to force these speculators to buy en masse precisely these stocks in order to limit potential losses – and thus drive the price even higher.
This is occasionally successful – but only until the hype is over. The most famous example is the increase in the price of Gamestop stock. Some hedge funds suffered heavy losses in the fight against the Reddit flash mob.
Cohen had also triggered a hype with his entry at Gamestop. However, the investor is still involved in the video game retailer, he is also the CEO. His involvement with Gamestop endeared him to many young speculators who saw him as an ally in the fight against the Wall Street establishment. Cohen founded pet supply retailer Chewy in 2011. In 2017 he sold the company for $3.3 billion.
Cohen’s investment in Bed Bath & Beyond had triggered multiple runs on the stock this year. Ironically, the most recent began after the company reported extremely lousy numbers, posting a net loss of $225 million for the second quarter. The company burns a lot of money: At the end of the year it still had $108 million in cash – a year earlier it was $1.1 billion. To solve the liquidity problems, the company hired external consultants. The first results should be available by the end of the month.