A 1994 quote by the Oracle of Omaha, Warren Buffett, may have summed up 2022 for all of us, saying, “You don’t find out who’s been swimming naked until the tide goes out.”
With the tap of easy money progressively tightened by the Fed, fundamentally weak meme stocks, pumped up by unprecedented hype created by retail investors on social media forums, found themselves getting cheaper while goods and services all around were getting costlier.
With the inflation rate for December moderating and Jerome Powell signaling the beginning of the “disinflationary process” with a dialed-down interest-rate hike of 25 bps, the market has been witnessing a rally even among the until-recently-beleaguered meme stocks.
However, the party may not last long. The red-hot employment data and recent comments from Fed officials may change the backdrop soon and strengthen the case for the central bank to continue tightening monetary policy further than previously anticipated.
Given the macroeconomic and market conditions, it could be wise for existing investors to make Greater Fool Theory work for them and offload fundamentally weak meme stocks GameStop Corp. (GME), AMC Entertainment Holdings Inc. (AMC), and Bed Bath & Beyond Inc. (BBBY) while the music lasts.
GameStop Corp. (GME)
GME leverages its e-commerce properties and stores to offer games, entertainment products, and technology. The company operates through four geographical segments: the United States; Canada; Australia; and Europe.
On September 7, GME announced its partnership with FTX US to introduce more of its customers to the latter’s community and its marketplace for digital assets. Within two months of the announcement, the cryptocurrency exchange collapsed due to a liquidity crisis of the company's token, FTT.
For the third quarter of the fiscal year 2022 ended October 29, 2022, GME’s net sales decreased by 8.6% to $1.19 billion. During the same period, the company reported an adjusted operating loss of $95 million and an adjusted net loss of $93.4 million, or $0.31 per share.
Analysts expect GME’s revenue during the current fiscal year (ended January 2023) to come in at $5.88 billion, down 2.2% year-over-year. During the same period, the company’s loss per share is expected to widen by 15.2% year-over-year to $1.31.
Moreover, GME has missed the consensus EPS estimates in three of the trailing four quarters and is expected to keep reporting losses over the next two fiscals.
GME has plummeted 52.5% year-to-date to close the last trading session at $19.27.
GME’s POWR Ratings reflect its bleak outlook. It has an overall rating of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
GME has an F grade for Value and a D for Stability, Momentum, and Sentiment. As a result, it is ranked penultimate among 45 stocks in the Specialty Retailers industry.
Click here for additional POWR Ratings for GME’s Growth and Quality.
AMC Entertainment Holdings Inc. (AMC)
As a theatrical exhibition company, AMC owns, operates, and has interests in theaters in the United States and worldwide. The Company operates through two segments: U.S. markets and International markets.
On February 6, AMC announced Sightline, a program that offers moviegoers differential pricing for seats based on sightlines to the movie screen. The segments in which the seats would be priced are Value Sightline, Standard Sightline, and Preferred Sightline.
While this initiative would help provide more value to its customers, it does little to address the broader issue of the preference of the majority of customers shifting from going to the theater for movies to streaming them from the comfort of their homes.
In December 2022, AMC announced a $110 million equity capital raise through the sale of AMC Preferred Units (APE) to Antara Capital, LP, at a weighted average price of $0.660 per share. The company also sought a special shareholder meeting to vote on its proposal to convert APE units into AMC common shares and reverse-split the number of AMC common shares at a 1:10 ratio.
The above announcement closely followed AMC’s December 19 announcement that it had raised $162 million of equity capital through sales of 125.9 million AMC Preferred Equity Units.
On December 14, AMC announced that it has partnered with Visa (V) and deserve to launch the AMC Entertainment Visa Card. It is expected to be available in early 2023.
These developments come at a time when the Federal Reserve is aiming to control inflation by restricting liquidity and consequently slowing discretionary expenditure. Moreover, given the evolving situation of a potential resurgence and spread of Covid, benefits of such additional investments are not expected to accrue to shareholders.
On October 20, AMC’s Subsidiary Odeon Finco PLC announced that it had completed its private offering of $400.0 million aggregate principal amount of 12.750% senior secured notes due 2027 at an issue price of 92.00%. Exposure to expensive debt in a rising interest rate environment may hinder the company’s bottom-line growth.
For the third quarter of the fiscal year 2022 ended September 30, AMC’s adjusted EBITDA loss widened 138.9% year-over-year to $12.9 million, while its net loss widened 1.2% year-over-year to $226.9 million. This resulted in an adjusted quarterly loss of $0.20 per share.
Analysts expect AMC’s loss per share for the fourth quarter of the current fiscal year (ended December 2022) to widen 72.7% year-over-year to $0.19. Additionally, the company is expected to keep reporting losses over the next two fiscals.
The stock has plummeted 66.3% over the past six months to close the last trading session at $4.90.
Due to its weak performance, AMC has an overall rating of D, which translates to a Sell, in our POWR Ratings system. It has an F grade for Stability and Sentiment and a D for Value.
AMC is ranked penultimate of six stocks in the F-rated Entertainment– Movies/Studios industry.
Click here to see additional POWR Ratings for Growth, Quality, and Momentum for AMC.
Bed Bath & Beyond Inc. (BBBY)
BBBY operates as an omnichannel retailer. It sells a range of domestic merchandise, like bed linens, bath items, kitchen textiles, home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and various juvenile products.
On February 8, BBBY announced that in addition to dozens of stores closed last year and 87 stores due to be closed after last month’s announcement, it would close several dozen of its namesake stores. This came after the company secured a financing deal on February 7 to avoid bankruptcy for now.
The deal, which involved the sale of convertible preferred stock and warrants to Hudson Bay and other investors, will provide Bed Bath & Beyond with $225 million upfront and up to $800 million over time.
This came as a huge relief to BBBY after the company missed interest payments to bondholders on February 1, saw its credit lines frozen, and couldn’t get banks to lend it money.
On January 19, BBBY disclosed that it had received a notice from Nasdaq on January 12 due to non-compliance with the requirements for continued listing since it has not yet filed its Quarterly Report on Form 10-Q for the period ended November 26, 2022, with the SEC.
BBBY has up to 60 days or until March 13 to submit a plan to regain compliance and, in case of approval, until July 10, 2023, to file the Quarterly Report to regain compliance.
For the third quarter of fiscal 2022, which ended November 26, 2022, BBBY’s net sales declined 33% year-over-year to $1.26 billion. This decline was mainly due to a 32% decline in comparable sales, driven by a lower in-stock position of approximately 70% and a decrease in customer traffic. The company’s gross profit decreased 58.3% year-over-year to $278.86 million during the same period.
BBBY’s adjusted EBITDA for the quarter came in at negative $224.99 million, compared to $40.64 million in the prior-year period. The company’s adjusted net loss for the quarter worsened significantly to $331.23 million or $3.65 per share.
Street expects BBBY’s revenue to decrease 29.1% year-over-year to $5.58 billion for the fiscal year (ending February 2023). The company’s loss per share for the same period is expected to worsen by 961.8% year-over-year to $11.47. Moreover, the company has missed its consensus EPS estimates in each of the trailing four quarters.
Shares of BBBY have slumped 77.6% over the past six months and 85.4% over the past year to close the last trading session at $2.35.
BBBY’s bleak prospects are reflected in its POWR Ratings. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. It also has an F grade for Stability and Sentiment and a D for Momentum and Quality.
Unsurprisingly, BBBY is ranked penultimate of 60 stocks in the Home Improvement & Goods industry.
Click here to see the additional POWR Ratings for BBBY’s Growth and Value.
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GME shares were trading at $19.79 per share on Monday afternoon, up $0.52 (+2.70%). Year-to-date, GME has gained 7.20%, versus a 7.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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