The newly minted class of Day Traders have moved on from buying shares of bankrupt companies like Hertz, to buying companies that are primarily owned by African Americans.
The Investment Theme: Capitalizing on the Black Lives Matter Movement
This is not a social commentary article. It's an article about what's happening in the stock market as a result of the recent and ongoing protests about the way people pf color are treated in our society. What's happening in the market is remarkable, and I'll show a few examples to illustrate my point.
Day Traders Glomming On To Black-Owned Businesses
Case #1. Urban One [UONE]
On March 23rd, the bottom of the bear market, UONE was valued by investors at $1.18 per share. By June 19th it was valued at $52.50. This wasn't just a 10-bagger, which is every investor's dream, it was a 44-bagger. And it accomplished this rare feat in just 62 trading days. What does it mean for the company?
If the company management acts quickly, they could issue more shares to the public, which would give them more capital to expand their reach. That would be a good thing.
Case #2. Broadway Financial [BYFC]
On March 23rd BYFC was valued at $1.16. On June 19th it traded as high as $7.05. It was a 6-bagger. This company could also capitalize on the rise in their stock price by issuing more shares to the public.
The tail wagging the dog
How can a group of small traders (average account size $2,500) who make up about 10% of the market drive prices ever higher when most evidence points to lower prices? I can think of three reasons. Social media, algo shops, and ETFs. Let's take them one at a time.
These day traders like to brag about their trading prowess and share their ideas on social media. If a day trader is an "influencer" as many are, they can have a huge impact on other traders, many of whom have a lot more money to work with. There's a multiplier effect here, and the Algo shops are quick to pick up on these trends.
Algo Shops. These shops are nearly 100% driven by computers. When they catch a rising stock like UONE, these algos are programmed to buy buy buy. On a larger scale they buy anything and everything that is moving higher. It matters not where the buying is coming from. Up is up, and that means buy.
ETFs. Most ETFs are passively managed. There is $4 trillion of investor money in ETFs. These pooled funds don't care about fundamentals like valuation or earnings. They only care about one thing - price. As the prices of their holdings increase, the price of the ETF increases accordingly. There is no manager to say "this is nuts, let's sell the most overvalued holdings." It's just buy buy buy.
Final thoughts
The tail that's wagging the dog is the small investor. Retail types. Day Traders. They are driving the algo traders and the ETFs. These are the folks who believe that the pandemic has been squashed and the economy is opening up.
Maybe that's true, but regardless, this is a moment in time where Black-owned businesses can reap the rewards of a new focus on the fact that they are trying to serve their communities. The good ones will be rewarded and the not-so-good will continue to struggle because being Black-owned is not enough to make a weak company strong.