Don't fight the tape

Keith Gill's huge GME options mistake is why I like my MOMO purchase so much

Deep value investors rarely if ever use the ancient market phrase “don’t fight the tape”, because being deep value means never having to say you know what short term price action will be. But once in a very rare moment, an exception appears.

I was struck by the inverse similarity of Roaring Kitty i.e. Deep F***ing Value i.e. Keith Gill’s GameStop call options purchase and my recent purchase of Hello Group (MOMO). The companies are in many ways inverses of each other, but most importantly one inverted factor makes MOMO attractive and GME $20 options risky.

Let’s start with GME. In May Gill finally posted online for the first time in a very long while. Posting a few memes was enough to provoke a fervor in GameStop traders. GME had been trading in the $10 range during April but after his posts GME briefly broached $60, then settled back to the low $20 range. According to screenshots posted online he then bought 5M shares at $21.27 and June 21 $20 calls for 12M shares at $5.48/share.

The option purchase appears to be a huge mistake because there was a huge likely influence on price action that Keith had to be aware of. GME started May with a little over 300M shares, but 4 days after its price spiked GameStop management opened an at-the-market (ATM) offering to sell 44M new shares. It closed at $27.67 the day before the ATM, and by the day it was completed GME closed at $19. But most importantly, their average sales price was only slightly over $21.

GameStop being prepped to drop ATMs at a moments notice means its market dynamics have changed massively from the 2021 short squeeze, but it looks like Keith didn’t comprehend that. Just weeks before buying $65M in very short dated $20 calls Keith Gill was given a clear example demonstrating management was prepared to drop an ATM for tons of new shares any time GME traded much higher than $20. And that’s exactly what happened when a second frenzy was ignited by Keith publicizing his GME purchases. That drove GME back up to close at $46.55 on the 6th (reaching $64 after hours). But the next morning GameStop rushed out its earnings announcement in order to immediately drop a new 75M share ATM. By end of day GME closed at $28.22 (closing at $24.83 Monday when the ATM completed). Keith hasn’t lost money yet (9 days left as I write this) but if he does take a large loss it was so easily foreseeable and avoidable that his GME calls purchase will likely go down as one of the worst trades in history.

So what does this have to do with Hello Group? Hello Group is a Chinese operator of dating and social media sites. Unlike GameStop, it’s profitable, and also unlike GameStop, it trades well below cash value (close to $8/per ADS in net cash while closing at $5.60 today). I normally pass on Chinese companies due to concerns over how trustworthy their financials are, but in this case they’ve paid out nearly $800M in dividends the last five years. That gives me a lot more comfort that their cash flow and balances are real. This post is already long enough so I won’t bore you with the rest of the details of why I like it, instead you can read this ValueInvestors.com writeup that does a very good job of summarizing the story.

So you must be thinking “how is MOMO similar to GME in any way”? Well, I said they were inverses and in MOMO’s case instead of management selling lots of new shares, they are retiring lots of shares. Overall Hello Group has paid an average of $5.48/share buying back 22.3M shares (about 10% of those outstanding) over the last two years. And their biggest purchases lately have occurred when MOMO trades below $6.

So Keith Gill gambled that GME’s price would increase significantly for three weeks while it was already clear that management would dump a huge amount of new shares on the market if the price increased significantly. Buying MOMO I’m making a long term bet on its price increasing while knowing management will buy back lots of shares until it does (and pay significant dividends while I wait). Its as if Keith is attempting to sail into a monsoon with a hole rapidly growing in his hull, while I’m sailing with a gentle breeze to my back, with a solid ship under my feet, fit and ready for a long and hopefully prosperous voyage.

As usual, nothing in this constitutes financial advice, do your own research before buying anything.