What New MULN and BBIG Reverse Splits Have Taught Us
Mullen Automotive (NASDAQ:MULN) and Vinco Ventures (NASDAQ:BBIG) both had new reverse stock splits in the month of May.
Mullen announced a 1-for-25 reverse stock split on May 3rd, and Vinco Ventures (BBIG) announced a 1-for-20 reverse stock split on May 10th.
In the past month since, MULN stock is down more than -85% and BBIG stock is down more than -41%.
Both companies were at risk of getting delisted from the stock exchange, hence the need to bump share prices up at the expense of shareholders.
Shareholders who held 100 shares of MULN were left with 4 shares, and shareholders who held 100 shares of BBIG were left with 5 shares upon the completion of a reverse split.
Unfortunately, Mullen Automotive was unable to trade above Nasdaq’s $1 minimum requirement for more than 10-consecutive days.
Now the company is looking at a max ratio of a 1-for-100 reverse stock split.
Vinco Ventures on the other hand is nearing the $1 minimum, currently trading at $1.27.
There’s a notion that AMC Entertainment’s reverse stock split is exempt from getting shorted back to current levels, but as much as we hope that be the case, that’s incorrect.
If there’s anything that the MULN and BBIG reverse stock splits have taught us is that company shares are still very much shortable even after a reverse stock split; in other words, there is no immunity.
Will AMC’s Reverse Stock Split Be Different?
AMC’s reverse stock split is meant to buy the company time for fundamental growth.
The company has improved drastically thanks to loyal customers and its loyal shareholder base.
High box office numbers this year indicate big growth for the company too, so there’s no denying the movie theatre chain is headed in the right direction, unless you’re Wall Street of course.
For AMC Entertainment, the best-case scenario would be if big institutions begin buying the stock at a higher share price or if shorts start closing their positions, initiating a short squeeze after a reverse stock split.
However, shares would now need to go up 10x in value for investors to break even and even higher to reach profitability (unless you’re a new investor from scratch).
If a shareholder’s breakeven point is currently $25 per share pre-split, AMC would need to hit $250 per share post-split just to break even (since investors would now have 10x less shares).
As mentioned in previous Mullen articles, investing in a company after a reverse stock split essentially becomes a form of crowdfunding in order to keep a company afloat.
Is the probability of AMC getting shorted back down after a reverse stock split stronger than the probability of AMC getting purchased at a much higher price than its current discounted share price?
I’d love to hear your thoughts on this below.
A short squeeze requires BIG buying pressure.
But what benefit do investors have from buying AMC stock 10x higher than at current discounted share price levels in attempt to squeeze short sellers?
Is there more incentive for short sellers to close their short positions pre or post reverse stock split?
Read: A Final Decision in New AMC Lawsuit Is Coming Soon
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I love reading your articles. But I think Saying that the share price would need to increase 10x for the break even point is a little misleading. The share price will automatically increase 10x with the split. 10 shares @ $5 will then be 1 share @ $50. It’s all the same, like getting a $10 bill for 10 $1 bills. You still have the same value. If the price goes up 5% on the one $50 share, you would have a share with $52.50. If the share price of ten shares @ $5 goes up 5% you would have ten shares worth $5.25. The ten shares add up to $52.50 same as the 1 share. It’s all about percentages.
Agreed! It is funny after using that analogy everybody else is using it too. There are some companies that that have done well after a Reverse Split. Like Xerox. https://www.cabotwealth.com/daily/stock-market/reverse-stock-splits-shareholders
Let’s start a conversation. Leave your thoughts below.