‘Unlikely to end well’: Retail investors warned on overhyped Reddit stocks

Professional money managers are warning retail investors the Reddit-fuelled rush into unloved tech stocks such as GameStop will end in tears, amid fresh signs the euphoria that has lifted share prices to stratospheric levels is spreading to Australia.

Shares in GameStop, the NYSE-listed video games retailer, surged 92.7 per cent in Tuesday’s session as day traders on the Reddit forum Wallstreetbets continued their quest to inflate the stock, fuelled by attention from prominent entrepreneurs including Elon Musk.

US regulators are likely to scrutinise the quadrupling of GameStop Corp.’s shares over the past two weeks. Credit: AP

Momentum has continued to build over the past month as online punters egg each other on to pump up stocks that are traditionally favoured by short-sellers, in what’s being billed as a revenge play on hedge funds and their short positions.

But fund managers warned Australian retail investors should tread carefully because share prices will inevitably come back down to earth. “As much as anything it’s just important to realise this is unusual behaviour and unlikely to end well,” said technology portfolio manager at Platinum Asset Management, Cameron Robertson.

“We all have a pretty good sense of where this ends up.”

Stake founder Matt Leibowitz says the cohort of users trading GameStop stock has grown five-fold in January.

Pengana international equities deputy portfolio manager Steven Glass said retail investors must keep in mind that stocks like GameStop are currently being driven higher by “pure speculation”.

“There’s a lot of bravado, about ‘we want to destroy institutional investors’. That’s not a reason for buying things,” he said.

Posters on Wallstreetbets are largely from the US and many have access to the trading platform Robinhood. However, Australian startups that give access to US share trading for local investors say they’ve also seen a small but growing cohort of traders take a sudden interest in stocks like GameStop.

Co-founder of Stake, Matt Leibowitz, said “there’s a niche core following these trends” and believed it was unsurprising some traders on the youth-focused platform would be interested.

Investors trading in GameStop via Stake’s platform increased five-fold this month, with 2 per cent of the company’s 230,000 trading in or out of the stock. The buy to sell ratio on the platform is 1.19, suggesting some users are selling into the rise rather than wildly speculating, Mr Leibowitz said.

Investors on Wallstreetbets were encouraging each other to buy in further on Wednesday after attracting global attention for their trades, including from Tesla founder Elon Musk, who tweeted ‘GameStonk’ with a link to the subreddit.

Co-founder of millennial-focused Australian investing podcast and community Equity Mates, Alec Renehan, said the mood inside Wallstreetbets has been “euphoric” and the stock moves have shown the power of retail investors leveraging online forums.

“Retail investors have found a space where they can congregate from any area in the world,” he said.

While some Equity Mates listeners are involved in the push into GameStop, for many Australian investors there is little appetite for this kind of trading, Renehan said. “We always talk about the merits of longer term investing.”

For investors in GameStop, the idea of making gains because the concerted effort of retail investors is exciting, however.

Equity Mates community member Coleen, who started investing last March and bought GameStop shares when they were $4 each, said it had been interesting to experience a “short squeeze” for the first time through the actions of Reddit traders.

“The thing I love about this particular squeeze is that it’s the retail investors who are joining together through online forums and swaying the movement of the stock simply by holding tight and being patient. I have to say, I kind of love the idea of millennials making thousands of dollars, knowing that that money came directly from a fund managers’ pocket.”

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