Investors who are short GameStop, AMC are out of their mind

CNBC’s Jim Cramer said Wednesday he wasn’t sure why investors are still betting against GameStop and AMC Entertainment, two of the so-called meme stocks popular on Reddit’s WallStreetBets forum.

The “Mad Money” host spoke out after a session in which GameStop shares rose nearly 16% and AMC rose 19% on Wednesday. Stocks are up 37%, or more than 60%, this week alone as speculative trading resumed that first took Wall Street by storm in January.

“Anyone who shorts AMC or GameStop is insane … WallStreetBets are too powerful, and trying to bet against them now just gives them more ammo,” Cramer said.

Despite some optimism about a possible turnaround spearheaded by Chewy co-founder Ryan Cohen, Cramer claimed video game retailer GameStop is still vastly overrated. AMC – which is still facing headwinds due to increasing digital streaming – is also expensive at the current level, said Cramer.

But Cramer said companies don’t trade on fundamentals, making short selling their stocks dangerous as long as they remain loved by Reddit traders.

Shorting a stock is essentially a bet that the price will fall. An investor such as a hedge fund borrows stocks and then immediately sells them in the market to later buy them back at a lower level. Then the investor returns the borrowed shares and benefits from the price difference.

If the opposite happens and the value of the stock increases, a short seller can try to minimize losses by buying stocks at their higher price.

Both GameStop and AMC have sold over 20% of their float shares short, according to S3 Partners. This compares to an average 5% short stake in a typical US stock.

“I’ve never seen anything like it: a group of buyers with no price sensitivity,” said Cramer. “These people don’t have unlimited firepower, but they have enough firepower to develop a short squeeze if a group of professionals decide to bet against this thing.”

– CNBC’s Yun Li contributed to this report.

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