Office Depot is the next buying craze for inexperienced retail traders. Like those before them, buyers of ODP could get wrecked by changing market fundamentals.
Retail traders continue making some unusual moves in the market. Their latest? Piling into shares of Office Depot (NASDAQ:ODP).
As with most reverse splits, like the one Chesapeake Energy (NYSE:CHK) did earlier this year, the move was designed to bring the price per share high enough to continue trading on the exchange.
Large companies that have fallen from grace make this move. The fact that these companies have declined so much that they need the reverse split is usually a huge warning sign to investors.
Tracking data from Robinhood show that traders jumped on to Office Depot shares with reckless abandon.
On the day of the reverse split, ODP was the most popular stock on Robinhood. As some exchanges reported initial confusion and delays in reporting the price change because of the split, shares briefly appeared to rally over 800%.
With information now updated, it’s clear that even with the split, ODP lost value overall on the day of the reverse split. Retail traders simply saw a potentially significant percentage move and jumped in.
It’s just another week in the retail-driven market.
Retail traders have had a great year. By most measures, their willingness to jump into the markets after the steep meltdown in March has paid off, often with returns beating professional money managers.
These moves have created several anomalies, however. Retail buying of car rental company Hertz came after the company declared bankruptcy, which pushed the share price higher. The company even asked the bankruptcy judge if it could take advantage of the move to issue new shares. The court said no.
With some of these unusual events occurring, it’s possible that the retail feeding frenzy won’t last forever. That’s also an argument bolstered by billionaire investor Jeffrey Gundlach.
Calling a V-shaped recovery in the economy “highly optimistic,” his critical insight is that:
I just don’t think they understand that this is not a fixed situation and there are several more shoes, if not Imelda Marcos’ closet full of shoes to fall on this economic and market situation.
Other institutional investors have also been more nuanced. This explains why, despite the frenzy in the stock market, overall sentiment remains neutral.
Gundlach knows the truth: the economy will likely throw curve balls that retail investors won’t be able to knock out of the park.
Many institutional investors will be caught off guard as well. Until that happens, retail traders will continue to move individual stock in unusual ways.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned companies.
Last modified: September 23, 2020 2:02 PM