The war between Wall Street short-sellers and the army of retail traders made famous by an influential Reddit chat board has spilled over into Europe, with sharp squeezes in a handful of midcap stocks generating intense price volatility.
By mid-morning in Europe on Wednesday, shares in German battery maker Varta (DE:VAR1) had risen a further 10.4% to another new record high, the third day in a row it had achieved the feat. It’s now up by some 43% in the last week alone.
It’s a similar story for another German company Evotec (DE:EVTG), a life sciences specialist. It’s surged as much as 35% over the last three days.
Finally CD Priojekt, the Polish video-game maker behind the CyberPunk 2077 game, has risen nearly 40% from late last week.
All three stocks had been shorted by the hedge fund Melvin Capital, which has become a lightning-rod for the anti-Wall Street sentiment bubbling among retail traders in the U.S. A number of posts on the r/wallstreetbets chatboard, which now boasts some 2.7 million members, suggest that what started out as a battle of convictions over the valuation of gaming retailer GameStop (NYSE:GME) has morphed into something much broader, leading to the targeting of any stock shorted by Melvin. Reuters reported on Tuesday that Melvin had closed its short on Evotec. The company didn’t confirm the report.
All three stocks, however, showed signs of peaking in Wednesday morning trade in Europe, and were well off their intraday highs by 5:30 AM ET (1030 GMT).
Varta, which has reinvented itself from a dowdy manufacturer of batteries for cars and toys to a specialist in micro-batteries for connected devices such as earbuds, has been a popular stock with German retail investors over the last couple of years. Its momentum has been helped in recent months by the prospect of generous subsidies from the European Union to build an industry capable of meeting the fast-growing demand for lithium-ion batteries from the auto sector.
That, however, has left Varta with the kind of price-tag that short-sellers are naturally drawn to: at Tuesday’s close, it was trading at over six times trailing 12-month sales and over 62 times earnings, Wednesday’s moves stretch that valuation even further.
Likewise, Evotec’s 5 billion-euro valuation at Tuesday’s close was more than 10 times sales and 350 times earnings. CD Projekt’s p/e of 138 seems relatively undemanding until one realizes that it represents 37 times sales and that the big driver of revenue growth – the much-delayed and bug-ridden CyberPunk – suffered one of the most embarrassing fiascos in recent memory at its launch late last year.
CyberPunk had to be withdrawn from most online game stores due to its bugs, but the company has now issued a patch which analysts say should see it back in Sony’s Playstation store by February.
CD Project (WA:CDR) stock is perhaps a special case: even before the war between Reddit and Melvin erupted, brokers had started to say that the sell-off in the wake of Cyber Punk’s botched launch had gone too far. It had fallen nearly 50% in December. Neither of the German stocks, however, has generated any news significantly changing their investment case in recent days, however.
As such, all three are trading at levels now dictated less by even a passing concern for accurate valuations than by the desire of Main Street America to settle scores with Wall Street. It makes for a fascinating spectacle, but it makes all three uninvestable for serious investors as long as the war continues.
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