Market Mushrooms

By:

Chief Strategist at Interactive Brokers

If you have a lawn or garden, you’ve probably noticed this phenomenon: when a rainy period follows a dry spell, all sorts of mushrooms appear, seemingly out of nowhere.  I assume they arise from pre-existing spores that are hard to see and laying dormant until the proper conditions arise.  Some of them get shockingly large almost overnight, and they often disappear just as quickly.  They’re fascinating organisms.

Now let’s engage in a bit of market mycology[i], so to speak.  We had a dry spell in the market that suppressed speculation for several months.  Then, about three weeks ago, fertile conditions returned.  And yesterday, one of the world’s largest companies by market cap, appeared out of nowhere. 

Raise your hand if you’d heard of AMTD Digital (HKD)[ii] before yesterday.  C’mon, be honest.  We’re not talking about TD Ameritrade, which had the symbol AMTD before it was acquired.  These are Hong Kong ADRs for a company whose website describes them as “Asia’s One-Stop Comprehensive Digital Solutions Platform.”  Their prospectus shows 2021 revenues of $25.2 million USD and profits of $22.1 million USD.  That’s an enviable profit margin indeed, but a relative pittance compared to the company’s current market capitalization.

HKD came public on July 15th at $7.80.  They opened for trading at a solid $13 that day, and spent most of the first four days of the following week in the $20’s, which was a nice gain.  Then on Friday the 22nd, they leapt from $20.32 to $68.  It’s not clear why, but that was only a taste of what would follow.  By the end of the next week, July 29th, it closed at $400.25.  Yet even that jump was a fraction of what would transpire this week:

HKD (US Equity), 2-Week Chart, 5-Minute Bars

HKD (US Equity), 2-Week Chart, 5-Minute Bars

Source: Interactive Brokers

Yesterday, HKD opened at $930, rose as high as $2,555.30 after touching $668.01, and closed at $1679.  Let those numbers sink in for a moment.  So far today, it’s been less volatile, but only marginally so.  We opened higher at $1900, touched a low of $990 and a high of $2117.80, and are now trading – briefly, between successive limit up / limit down halts – at $1,398.50.

That gives us a market cap of about $258 billion USD.  For perspective, that is about the same as Bank of America (BAC), which earned over $30 billion last year. 

If that’s not crazy enough, HKD is a subsidiary of AMTD IDEA Group (AMTD).  That company has a market cap of $2.6 billion.  Yes, the subsidiary sports 100X the market cap of the parent.  Of course that’s irrational.  Good luck trying to arbitrage the differential.  Under normal circumstances, we would want to sell HKD short against buying AMTD.  But good luck trying to borrow HKD shares.

I’ve been asked if HKD was a meme stock.  On the surface, it acts like one.   Undoubtedly many of those trading the shares were involved in the various meme crazes, too.  But this hasn’t caught the public’s imagination like the meme stocks did.  We all know what those companies do, and there was some nostalgia amidst the love. 

No, the small float (16 million shares) and lack of listed options make it difficult to consider HKD a true meme stock.  Like one of those huge mushrooms that periodically appear on my lawn and garden beds, this is a difficult to identify, fascinating – and potentially short-lived – organism.

[i] Mycology is the branch of biology concerned with the study of fungi.

[ii] Not to be confused with the common symbol for the Hong Kong Dollar, which is commonly referred to as HKD

Disclosure: Interactive Brokers

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