CWS Market Review – May 14, 2024

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The Return of Roaring Kitty

Yesterday, shares of GameStop (GME) soared 74%. At one point, the stock was up another 110% today, meaning it doubled on top of yesterday’s explosive rally.

On Monday, trading was so heavy in GME that within the first 90 minutes, the stock was halted nine times. Trading volume was 30 times heavier than normal.

So what caused this rally? A great earnings report? A possible merger? Nope, none of these.

The answer is that Roaring Kitty tweeted.

Confused? Allow me to explain.

GameStop rallied on the news of the return of Roaring Kitty. That’s the nom de Twitter of Keith Gill, the hero of the meme stock universe.

Three years ago, Mr. Kitty’s advocacy of GameStop spurred a frenetic rally in the stock. In six months, GME went from $1 per share to $120 per share, and it was all led by posters on Reddit, the WallStreetBets subreddit in particular.

At one point, 140% of GME’s shares were held short. Some prominent hedge funds who were short GME saw their trades get completely blown out of the water. For once, the plucky amateurs routed the smug Wall Street professionals, and Roaring Kitty was their unofficial leader.

Mr. Kitty’s Twitter account has been dormant for three years. The silence was broken Sunday evening when he tweeted what appears to be a man leaning forward with a game controller. The consensus is that Roaring Kitty has announced his return to action.

He posted again on Monday. It’s a short video with the words “Fine, I’ll do it myself.” If nothing, he has a sense for the dramatic.

I’ll confess, I’m a big fan of Roaring Kitty and I’m very interested to hear what he has to say. About GameStop, the stock has not performed very well. After peaking at $120 in January 2021, the shares dipped below $10 a few weeks ago. Perhaps that sparked Kitty’s interest. We’ll see.

Of course, there’s a longer story involved. Wall Street is no stranger to manias and bubbles. In the 19th century, Charles Mackay wrote, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

When Roaring Kitty first pushed his analysis on Twitter in August 2020, he cc’d several Wall Street big shots, one of whom was your humble editor. Sadly, I don’t recall seeing it. I only learned of it later. I wish I had paid attention.

The important point I want to stress is that there’s more to a trading bubble than share prices. For example, the meme stock craze happened in the early Covid period. That was a very unusual time. People were looking for an outlet. Plus, the Federal Reserve had slashed interest rates and the government had spent tons of money to help keep the economy afloat.

As a result, investing risk was removed from the market. I’m not saying that those decisions directly caused GME to rally, but it helped set up the environment where an explosive rally could thrive.

Not only that, but the rise of Reddit helped spur a culture of relentless amateur investors who wanted to take down traditional Wall Street. That’s why Bitcoin is a close relative to meme stocks.

There’s still a lot of anger at Wall Street and I certainly understand why, but 2024 is not like 2020. Covid has gone away. The Fed has raised interest rates. Investors have moved on. (I always find it interesting how often GameStop is incorrectly called GameStock. That’s a classic case of an error which tells you the truth.)

Is GameStop a good investment? I’m skeptical. Last year, GameStop reported a net profit of $6.7 million. Many ballplayers make more than that. GameStop has a market value of around $13 billion. In other words, it’s going for 2,000 times earnings.

Bloomberg quoted one analyst on GameStop: “Game sales are flattish, hardware sales are down, and the shift to digital downloads continues, so it’s highly unlikely GameStop can stop shrinking.” That doesn’t sound good. GameStop is due to report earnings in a few weeks.

As I said, I’m a fan of Roaring Kitty and I want to hear what he has to say, but for now, I’ll watch GameStop from a safe distance.

Bristol-Myers’ Impact on Earnings Season

We’re just about done with Q1 earnings season. More than 90% of companies in the S&P 500 have reported results. There are a few more reports due to come in. So far, the earnings season is much better than expected (or feared). Earnings growth for the S&P 500 is tracking at 5.15%. That’s up 1.46% from just a month ago.

That’s the best growth rate since Q2 2022. More than 76% of companies have beaten their earnings estimates.

There is, however, a statistical footnote to these results and that’s Bristol-Myers Squibb (BMY). If you exclude BMY’s massive loss, then earnings growth for the whole index rises to 8.3%. One company’s loss weighed the whole market down by 3%.

For the quarter, BMY lost $11.9 billion or $5.89 per share. The loss was primarily due to BMY’s buying neuroscience drugmaker Karuna. BMY actually beat its revenue estimate, but the company also announced a cost-cutting program, and it will lay off more than 2,000 workers.

Stock Focus: Allison Transmission Holdings (ALSN)

My friend JC Parets has started calling small, underfollowed companies “Eddy Elfenbein-type stocks.” I’m flattered.

I have another one for you this week which is Allison Transmission Holdings (ALSN). As you might guess, Allison makes automatic transmissions for trucks, buses, and industrial and military vehicles. Except for its earnings reports, Allison almost never makes the news.

It’s a profitable business. Allison currently has a market value of $6.5 million. Over the last 12 years, the shares have gone from $17 to $75. The quarterly dividend has gradually increased from six cents per share to 25 cents. Allison has increased its dividend for the last five years in a row.

Currently, seven analysts follow the stock which is more than I would have guessed. Tesla is followed by more than 30 analysts.

Last month, Allison reported Q1 earnings of $1.90 per share. That was one penny better than estimates. The shares are currently going for just under 10 times this year’s earnings estimate, and only 8.6 times 2025’s earnings.

I’m going to keep a close eye on Allison. This is a good stock with impressive margins. If only it had a Roaring Kitty of its own.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on May 14th, 2024 at 5:52 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.