The reopening trade has become one of the most popular investment trends over the last year. The pandemic has completely changed our lives. From what we do, to how we do it - life is not the same anymore. This also relates to investing. The lockdowns and imposed measures have also impacted businesses tremendously.
Some more than others. In fact, some industries have been completely ruined by the pandemic. Following the devastating stock market crash of March 2020, not every stock has rebounded. The stocks in the industries that were most affected have made considerable gains, but some have not returned to previous levels.
Within the investment community, a growing investment trend has taken place. Reopening trade is a trade based on the expectation that the business will perform better once the lockdowns and restrictions are lifted. This has gained quite a lot of popularity, and some of the most impressive returns have been achieved in reopening trades.
Where to look for reopening trades?
A reopening trade is mostly based on the idea that the underlying business results will improve, once the economy reopens. Some of the industries that were most affected by the pandemic are usually the best places to look for reopening trades. A few examples come to mind, like airlines, cruises, hospitality, food service, and even cinemas. All of these industries that have essentially collapsed due to the propagation of the virus have become the best place to look for reopening trades.
Some reopening trades are overpriced
As of today, reopening trades have become so popular that some of the stocks are now trading higher than before the pandemic hit. There seems to be herd behavior driving the prices of some of these reopening trades. The most memorable is by far AMC. The rise of the retail investor, combined with meme stocks has made AMC one of the largest speculative bubbles in the market.
AMC also seems to be a FOMO stock. Driving retail investors with very little knowledge of the market to push the price of this stock even higher. In early 2020, the stock was trading somewhere around $6 and $7. Today it is trading at over $40. At these levels, there seems to be too much detachment from reality.
Overcrowded reopening trades have become good short ideas
Although the reopening will be very positive for some companies, there are some reopening trades that have become overcrowded. This means that too many investors seem to be expecting the company to perform better, once the economy reopens. Some of these stocks are even trading at higher levels than before the pandemic. The pinnacle of this detachment from value to price is AMC.
Reopening trades like AMC, which have become meme stocks are some of the most attractive shorts in the market today. The high volatility and high premium on the options are the only disadvantages. Contrary to what is the norm in the markets, stocks like AMC completely redefine the efficient market hypothesis. The ability of retail investors to target a specific stock, in order to raise its price is something unprecedented.
How to take advantage of a reopening trade?
Despite some of the reopening trades being crowded, there are still stocks out there that will benefit from the reopening and are fairly priced. Finding these stocks seems to be a better option, than looking at the crowded reopening trades. This will allow you to look at stocks, that are not overvalued, and that will also benefit from the reopening.
A few industries come to mind, notably the oil industry. Most of the oil stocks tumbled, following the March 2020 debacle. Some have returned to previous levels, and some are still trading at very low valuations.
Bottom line
Reopening trades have become one of the most popular trends in the markets. There are ways of taking advantage of the reopening, but currently, most of those reopening stocks are not undervalued anymore. However there are still some stocks out there that are great reopening trades, and continue to be fairly or undervalued.
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