Are these the next stocks the same?
When the curtain closes on 2021, it will no doubt be remembered as the year retail investors warned Wall Street. While retail investors have been putting their money to work in the market for over a century, we have never before seen their efforts to drive up equity valuations translate into such impressive results. Actions even become the center of attention  While not an exhaustive description, retail investors on Reddit and other social media discussion boards have banded together and sought out stocks with high levels of near-term interest. Since a large percentage of short sellers are institutional investors or hedge funds, the rise of the retail investor has taken on the appearance of a David vs. Goliath battle. Specifically, these retail traders are trying to make short cuts on stocks that are heavily sold short. This creates an event where the short sellers run out, causing the stocks to skyrocket rapidly as the short sellers buy to hedge their position. Video games and accessories retailer GameStop is the perfect example of what can happen when the conditions are absolutely perfect for a short squeeze. The companies that Reddit marketers focus on are now known as Memes Stocks. This is because they are valued for their popularity on social media, not for their (often poor) operating performance. While no one knows this answer for sure, here are three of my best guesses. Flashing charge  The first is the network of electric vehicle (EV) charging products and services Flashing charge (NASDAQ: BLNK). For starters, Reddit investors are often younger, and young people are more likely to call for action to be taken to tackle climate change. Beyond simply moving away from fossil fuels, ancillary players like Blink Charging will need to step in to help provide the infrastructure for an army of electric vehicles that will be on the roads for years to come. The other notable factor is the combination of short interest and short ratio (also known as days to cover). As of May 28, Blink had nearly 12.5 million shares short and free float of 35.9 million shares. This is short interest compared to the free float of 35%. More importantly, Blink Charging has seen just under 3.5 million shares traded daily over the past three months. This suggests that it would take more than three full days for short sellers to exit their positions, if they choose to do so. However, Blink certainly fits the definition of meme stock if you take a closer look at its operating performance. The company produced (drumbeats) just $ 2.23 million in sales in the first quarter (thats a $ 1.62 billion company, for context). By comparison, operating expenses, including compensation, more than doubled, resulting in an operating loss of $ 7.39 million. But what is perhaps most frightening is that the companys track record gives no indication that it is putting its money at the service of research and development. The entire EV space (cars and ancillary products / services) depends on innovation. With acquisitions as the only weapon, Blink Charging will likely struggle in the long run. Dave & Busters  Although this has been off the radar on WallStreetBets discussion boards, entertainment and restaurant chains Dave & Busters (NASDAQ: PLAY) just might be the next store of memes. On the contrary, the companys stock symbol (PLAY) is the perfect starting point for retail investors. Similar to Blink, there are two reasons why this would make a perfect store of memes. First of all, retail traders are big fans of recovery stocks left to die in the wake of the pandemic. Last year there were serious concerns that Dave & Busters would not survive. But more than a year after the coronavirus pandemic was declared, things appear to be improving. The strong adoption of adult vaccination in the United States and the easing of restrictions on coronaviruses in many states resulted in positive operating income before depreciation and amortization at 127 of its 138 stores, as of May 2, 2021. The other catalyst, as you might expect, is the right recipe for a short squeeze. As of May 28, just over 7.8 million shares of the company were held short. It may not seem like much, but Dave & Buster only has 42.4 million shares in its float. This corresponds to a short-term interest of over 18%. Yet what really stands out is its muted average daily volume of 1.36 million shares. It would take almost six full days for short sellers to hedge their positions, based on this three-month volume data. This is a recipe for worrying pessimists. But keeping the theme of memes stocks, Dave & Buster still hasnt come out of the woods on an operational basis. Selling stocks and going into debt absolutely helped the company get through the worst part of the pandemic. Again, interest expense totaled 5.6% of net sales in the first quarter, compared to just 1.1% of total sales in the first quarter of 2019. Equally worrying, the companys current liabilities ($ 279.2 million) are well over double its current assets ($ 111.4 million). This suggests that Dave & Buster does not have the capital to meet its spending obligations over the next 12 months. An improving economy could help those numbers a lot, but its future remains risky at best. Intercept pharmaceuticals  It is also possible that small-cap biotech stocks Intercept pharmaceuticals (NASDAQ: ICPT) becomes the next stock Reddit meme. One of the reasons retail investors are bound to love Intercept is its volatility. Intercepts beta is north of 1.5 which means that on average it is moving over 50% more than the wider market. For example, if the reference S&P 500 increases by 1%, we would expect to see Intercept increase by more than 1.5%. The same is true when the broad market is also falling. Plus, Intercept is the perfect candidate for a short squeeze. As of May 28, just over 6 million shares were held short. Again, that doesnt sound like a lot  but its a lot when the total free float is only 28.3 million shares. This equates to 21% short-term interest. Its also worth noting that Intercept only sees an average of 1.11 million shares traded daily. Thus, it would take well over five days for short sellers to fully exit their positions. However, as an Intercept shareholder, I can also attest that there are justifiable reasons for people to be pessimistic. Last year, the United States Food and Drug Administration (FDA) sent the company a full response letter for obeticholic acid (OCA) as a treatment for non-alcoholic steatohepatitis (NASH). To boot, a stricter black box warning has been added to Ocaliva, an approved treatment for primary biliary cholangitis. I always expected the OCA to get the go-ahead for NASH, even if only for a small subset of the sickest patients. Since there are no approved treatments for NASH, this gives Intercept an even better case for approval. The problem is, it could be some time before more clinical data becomes available for the company to make another attempt at FDA approval.