There are many companies that make a splash in the markets or in the news, only to find failure a short time later. These stocks that tend to reach headlines, social media trends, and overall watercooler talk to this degree tend to present traders with numerous opportunities to make money. So when these stocks and plays occur, it is important that we review them and learn from them. HMNY is one of those stocks as of late. In this post we will breakdown who HMNY is, for those who haven’t been paying attention, and what the trade we took was.
For Those Who Don’t Know
HMNY, or Helios + Matheson, bought a majority stake in a company called “movie pass” in August of 2017. This is a company that was trying to be a subscription-based system to go to the movies. With move pass you can pay a monthly fee, and virtually go to the movies as many times as you want in that month. There were obviously some other stipulations and string attached but that was largely the business model and when the model started out, it was only $9.95 a month. A month later, they announced they already had over 400,000 paying subscribers and in October of 2017 they stated their projections were the exceeding of 3.1 million subscribers through August 2018. This naturally caused some volatility and stir in the stock and over the course of about 1 month, the stock went up over 1000%. This obviously became a hot topic to talk about as many people came out on both sides of the argument as to whether it was a sustainable business approach and what the true value of the stock was.
Now I don’t really care who you are as a company but trading up to that degree in that span of time, is almost always going to be overblow. And in the span of another month, by the end of October 2017, the stock had reverted back to only being up around 300%+ since the beginning of September. This is still a major move for such a small priced stock and HMNY was not done being in the news just yet. Over the following months the news reports from HMNY started to have less and less of a reaction in the stock price and traders and investors alike started to realize one major thing, Movie Pass was not making money to cover what they were spending.
At various points in 2018 Movie Pass stated that they were changing their model/system. They changed their prices numerous times, the movies offered, the process to getting your tickets, and everything else they could think of. They tried various things as the stock price slowly traded back down to $0 time and time again until eventually they decided to perform a 250:1 reverse stock split. This bring us to the specific trade we are going to cover.
The Reverse Stock Split Short
So HMNY was trading at pennies, trading as low as .08 just prior to the reverse split. Movie Pass was clearly not retaining that growth and popularity it had projected and was not making enough money to sustain how much it was paying for movie tickets. Investors and analysts were looking into their cash flow and statements and seeing that they only had enough cash on hand for a few more months of operation. So in an attempt to possibly boost the stock price back up to a reasonable price and maybe get some volatility back and save the stock, HMNY performed a 250:1 reverse stock split near the end of July. Now this isn’t the largest stock split in history but trust me, it is much larger than normal.
What is a Reverse Stock Split?
As we have covered in lesson plans, a reverse stock split is what a company decides to decrease the amount of outstanding shares there are on the market to bring about a larger stock price. They typically do this is they want to decrease share float or if the stock price is getting too low for the company’s standards, as well as a variety of other reasons.
So lets give an example:
Suppose company A has 1,000,000 shares oustanding and the stock is trading at $10 a share. That means the company’s value, or market cap, is $10,000,000 (10X1,000,000). So now say that the company decides to do a 2:1 reverse stock split. That means that for every 2 shares of the stock that exists, there will now be one. So instead of 1,000,000 shares there will be 500,000. Well technically the company fundamentals have not changed at all. Nothing has changed about the company, so theoretically the stock should be trading at the same market cap the next day. So theoretically the next day the stock should be trading at $20 a share, still giving it a $10,000,000 market cap (20X500,000). So if you had 1,000 shares of that stock at $10 prior to the reverse split, afterwards you would have 500 shares at $20.
Back To The HMNY Trade
So theoretically, even though they have performed this crazy reverse split, nothing has changed about the company itself. So if you think it is going to $0, that theory should still technically hold true. Now we say technically because with such a large decrease in the share count comes much easier ways for shorts to get squeezed and for a stock to be manipulated higher or lower, if the share count is lower. And just because a company has issued a reverse stock split does NOT mean it has to go back down right away if at all. So there are still risks associated with trading these so aggressively. You never know, someone could have come out the next day and stated their intent to acquire HMNY and caused the stock to skyrocket. So if you want to, understandably, avoid some of this risk, there were still day trading opportunities GALORE in the following months shorting this thing.
However, a company like HMNY that has such low cash flow, does not have the capital to keep the lights on for much longer, does not have a sustainable model, and has been absolutely crushed by the markets is a stock you should definitely watch. This reverse split caused HMNY to open up around $14 the next day, with the previous close being $21.25.
Now I know this is Monday morning quarterbacking but this is a trade that many traders, including us, had felt was worth putting on and it was very successful trade. As we write this blog HMNY has since returned back to trading at .07 a share!! So if you saw the news of the massive reverse split and you had capital to spare, you could have tried to put on as many shares short as possible. Some traders got over 1,000,000 shares short easily prior to the reverse split. Because for every 1 million shares you had short after the split you would only have 4,000. That following day the stock closed around $10 and you would have made 50%. If you very confident in your short you could have held that short EVERY day since the reverse split and not experienced a green day ONCE until August 6th, but by then the stock was trading at .06.
Now again we are not saying to simply blindly short these reverse splits. And we aren’t even saying that if you wanted to play this stock you had to enter prior to the reverse split. But after the split occurred if you like to day trade these momentum, fast moving, low priced stocks, then this is a stock that provided endless opportunity. These are the plays that come around every once in a while that can provide opportunity even in the summer months.
Here is a chart showing the post split price action the following days. I mean look at that selling.
And here is a more zoomed in chart of the 3 days with the most day-trading potential. I mean you could have simply shorted the break down of lows every day and been fairly confident in your entries.
