Do not be quick on meme shares

Interactive Brokers founder and chairman Thomas Peterffy warned on Monday investors betting against so-called meme stocks like AMC Entertainment.

“These stocks are extremely tempting to buy short, but unless you have huge liquid resources, try to resist the temptation as these prices can hit unimaginable highs before they settle down to a reasonable valuation, and you may have to cover on the high. ” Period, “said the online brokerage pioneer in an interview with CNBC’s” Squawk Box “.

AMC’s shares rose as much as 25% on Monday and eventually closed 14.8% higher. The stock rose 83% last week alone, despite declines on Thursday and Friday. At the close of trading on Monday, AMC shares were up approximately 2,500% in 2021.

“Over the long term, stocks are always approaching their fundamentals, which in this case are much, much lower,” Peterffy said, admitting that this is why short sellers see an opportunity in certain stocks like AMC, which have risen in price after exiting. Reddit dealers were preferred.

Short selling a stock is a bearish strategy in which an investor borrows stocks and then immediately sells them in the expectation that the price will go down. In this case, the short seller buys back the stock at the lower level and returns the number of stocks borrowed to take advantage of the difference. If the opposite happens, a short can try to limit his losses by buying back the stock at higher prices.

Peterffy’s comments come after a wild week of trading at AMC and a few other companies like Bed Bath & Beyond and BlackBerry. While GameStop drew most of the attention in WallStreetBets’ epic short squeeze in January when the Reddit-fueled trading frenzy first surfaced, AMC has risen its profile – and share price – over the past few weeks.

The cinema chain, hard hit by the Covid pandemic, has capitalized on the enthusiasm of private investors by selling additional shares to raise money. AMC has also launched initiatives aimed at its retail investors, such as exclusive demonstrations.

Despite AMC’s efforts, Peterffy said the company still had a difficult road to go to justify its valuation and suggested that long investors who want to buy and hold the stock should stay away as well.

“If you’re willing to sit there and hold a stock at $ 200, $ 300, $ 400 that is still not making any money … there is no way that prices can be held at that level because more and more people are shorting them be, “he said.

“At some point these stocks will go back to their value, which is roughly the single-digit dollar range, even if that is,” he added. “Long-term long positions will lose their money. So while you as a trader may be trying to catch a sudden uptrend, I would advise against buying these stocks.”