As markets rebound, this action proves retail investors’ hopes are alive and well

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SOCDs continued on Tuesday in an attempt to recoup some of the ground they lost earlier in 2022. Investors appeared to have mixed views on the likely path of the economy, interest rates and inflation , but after the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P500 (SNP INDEX: ^GSPC)and Nasdaq Compound (NASDAQ INDEX: ^IXIC) spent part of the morning down, they all ended the day with gains of nearly 1%.

Index

Percent Daily Change

Daily point change

Dow

0.80%

+264

S&P500

0.95%

+39

Nasdaq

0.94%

+114

Data source: Yahoo! Finance.

Those gains for major market benchmarks were nice, but they were small compared to a company’s move on Tuesday. Below we will take a closer look at why Redbox Entertainment (NASDAQ: RDBX) is back on short-term traders’ radar screens, and why it’s a sign that retail traders are still looking to take advantage of stock supply constraints to wreak havoc on those investing based on fundamentals at longer term.

The upward movement for Redbox

Redbox’s gains over the past three weeks have been monumental. As recently as May 18, the company behind the once ubiquitous DVD rental kiosks was trading below $3 a share. Tuesday’s 28% jump took the stock price to $8.55, triple what it was less than a month ago.

Image source: Getty Images.

If you only looked at Redbox casually, some aspects of its financial situation might seem to justify its rise to prominence. As part of its merger with a SPAC that will be made public, some of the losses Redbox suffered before the merger come as positive adjustments to net income. As a result, some financial services are showing Redbox making a massive profit that leaves it with a single-digit price-to-earnings ratio.

It is still trading well below the $27 per share it reached in late October the day after its SPAC merger. That’s even below the $10 per share price SPAC’s initial investors paid before the deal was announced. But for a company in the state of Redbox, the recent tripling of the price of spare parts seems suspicious.

2 reasons to worry

One problem is that Redbox continued to lose money in the first quarter. Its total net losses were $41 million, and while some of those losses were attributable to a non-controlling interest, Redbox still posted a net loss of $0.11 per share attributable to shareholders. ordinary.

Worse still, Redbox agreed to a merger at a value well below its current price. Chicken soup for the entertainment of the soul somehow convinced Redbox to accept a deal under which its shareholders will only receive 0.087 shares of Chicken Soup for every Redbox share they own. With Chicken Soup at less than $7 per share, Redbox shareholders could get less than $0.60 of value for every Redbox share they currently own — a discount of over 90% to the closing price. of Tuesday.

What should happen

For Redbox shareholders to come out on top, the merger with Chicken Soup would have to be called off. Additionally, the company would have to start becoming profitable again – or at the very least, retail investors would have to offer Redbox shares at such high levels that the DVD rental company could issue a secondary stock offering to raise cash. funds in order to create value. .

The story of AMC Entertainment Holdings (NYSE: AMC) shows that such moves can work – at least, for a while. With Redbox, they seem to be a long way off – but at the very least they show that retail investors still have a few tricks up their sleeves.

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Dan Caplinger has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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