Appaloosa Management founder David Tepper (Trades, Portfolio) warned on Thursday that investors who are "long and playing the speculative game" going on in the market over the past few days must be prudent about the risks of engaging in such trades.
Tepper, who announced in 2019 that he plans to eventually convert his hedge fund into a family office, sent a note to CNBC's Joe Kernen warning about how the current speculative trading in high short interest names like GameStop Inc. (GME, Financial) and AMC Entertainment Holdings Inc. (AMC, Financial) resembles a similar situation that Tepper experienced around the 2000 dotcom bubble:
"It was partyon.com in 1999 that screwed the shorts, and it is now gangup.inc. It did not end well when the dot com bubble popped. Been there, done that. Old scars."
The billionaire investor's comment comes just a few weeks after he told CNBC's Jim Cramer that he has a "more positive view of the stock market" following the rollout of coronavirus vaccines and a Federal Reserve that stays "accommodative."
Cramer also flashed back to Tepper's comments in a Feb. 1, 2020, interview that the Covid-19 virus "could become a game changer." The markets would later enter a multi-week plunge that saw the Dow Jones Industrial Average drop close to a three-year low of 18,591.93 on March 23, 2020. Likewise, Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)'s favorite market indicator tumbled near a three-year low of 111.6%.
Retail brokerages restricts trading in speculative names
Retail brokerages like Interactive Brokerages (IBKR, Financial) announced Thursday morning that they restricted trading in GameStop, AMC and other speculative names like BlackBerry Ltd. (BB, Financial), Express Inc. (EXPR, Financial) and Koss Corp. (KOSS, Financial) given the "extraordinary volatility." Thomas Peterffy, chairman of the Greenwich, Connecticut-based brokerage company, said on CNBC's "Closing Bell" that Interactive Brokerages enacted the restrictions to safeguard the "integrety of the marketplace and clearing system."
Shares of GameStop crashed to an intraday low of $113.50, down approximately 67% from Wednesday's close of $346.37. Despite this, the stock remains significantly overvalued based on Thursday's price-to-GF Value ratio of 14.96.
GuruFocus ranks GameStop's financial strength 4 out of 10: Although the company has a strong Altman Z-score of 8.41 and a safe Beneish M-score of -4.11, GameStop's equity-to-asset and debt-to-equity ratios underperform over 85% of global competitors.
Gurus with holdings in GameStop include Lee Ainslie (Trades, Portfolio)'s Maverick Capital and Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Based on GuruFocus estimates, Michael Burry's Scion Asset Management has an estimated gain of 876.51% on the stock since initially purchasing shares during the fourth quarter of 2018. An article sourced from Business Insider reported the estimated gains reaching as high as 1,500% on Monday following the stock's massive rally.
Disclosure: The author has no positions in the stocks mentioned. The mention of stocks in this article do not constitute a recommendation to buy or sell the stock. Investors must conduct their own research before making trades in the stock market.
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