Take rationality and throw it out the freaking door. Take the idea of shorting anything other than big names and indexes and toss it out the window.
We've lost the last semblance of sanity.
If you haven't already realized it, traditional metrics don't matter. And shorting individual momentum stocks in this market is scarier than heck. The problem isn't just finding a top, it's knowing there may not be a top you can live through.
Take Quantumscape ( QS) as an example. The company looked aggressive when it hit $30, but the excitement and potential -- plus the strong backers -- made it feasible. Then, a quick run to $50 with production since half a decade away made it a head-scratcher. All it took was PR on a successful tiny test of the tech to move shares from $50 to a high of $87.50.
With the stock trading around $77, the market is now $34.5 billion. And that assumes none of the warrants see the light of day as shares. Management of the two companies projected the 2028 Enterprise Value in the range of $32 billion to $58 billion with $45 billion as the midpoint. With the current Enterprise Value at $33.3 billion in 2020, one does have to wonder about the market.
We're not talking about management projections for 2022 or 2024 and we're seeing some pull forward or valuation adjustment because of the recent small trial test success. We're seeing valuation enter the range the management of the very company deemed appropriate for 2028!
Still, I can see some misguided logic in this. QS could become the next generation battery with a huge advantage over existing products. And it could stretch outside vehicle battery to other storage or other applications.
But turn the page to Greenwich Lifesciences ( GLSI) . The company entered the day with a market of $62 million. Around the highs of the day that number increased to $1.9 billion. That's billion with a "B." Let's call it a 3000% gain. The company grabbed attention with these headlines:
"Greenwich LifeSciences Announces Poster Presentation of Five Year Data for GP2 Phase IIb Clinical Trial, Showing 0% Recurrence of Breast Cancer."
This is definitely eye-popping. I would note it is not phase three, so there's still work to be done. No doubt the $62 million market cap no longer fits the risk-reward, but $2 billion? I'm sure some pros better suited to biotech will chime in, but $2 billion feels more like strong phase III results or even post-Food and Drug Administration approval. I've seen some doubts cast on whether the trial was actually a success or not.
But combine a sexy headline with a stock housing a float under 2 million shares, and you get electricity. Add in the bonus of an initial price tag in the single digits, and you get the same thing we've seen all year: Greater Fool Theory. This market is creating more millionaires and bagholders on the same day in a single security than any time I can remember. In short, chasers are getting ruined, but those who can find the names (and encourage others to follow) are making a killing.
It also makes shorting next to impossible, because there is no rationality to the buying. On the GLSI news we're seeing unrelated cancer stocks pop, because they are simply low dollar with a low float. You can call it trading (I do) but you can also call it gambling.
The current thesis:
Find a "cancer" stock in the single digits with a low float.
Q: What does it do?
A: Who cares.
Q: How's their tech?
A: Doesn't matter.
Q: Management?
A: They're breathing and have a heartbeat.
Q: History of the science?
A: It's in the past, so who cares.
Q: Do they have a trial?
A: Aren't we all on trial?
I'm in!
We're accustomed to some sense of gambling with trading and stocks, especially if you trade momentum. But when we see moves like this, a creeping worry about the overall market health enters the back of your mind. Yes, we're seeing wealth created for those who get in early and don't overstay their welcome. I worry, too, that we're ruining a multitude of new traders to the market that were drawn in by the huge gains they see being discussed.
The short of this: Be careful out there. More signs of froth are hitting every day. I suspect we'll get another day like today with these big clips of 5% to 10% on individual names in the next few days. That's when I'll look to buy. For now, I'm around 2/3rds in cash with a few select positions. Ironically, that's all you need these days to still perform well. I think it's the right approach for the next week. That's how I'm playing it.
