In the investment sector, you win some and you lose some. Don’t let anyone tell you differently – everybody’s got a system that works wonders in a bull market. It’s when things go awry that you find the best systems that still win about 60% to 70% of the time. Which leaves a lot of room for error, like my call on Castor Maritime (NASDAQ:CTRM) stock.
In early April, I looked at some publicly traded companies that were popular on social media forums like Reddit. CTRM stock is definitely one of those names. I first researched the global shipping company for Benzinga. At the time, shares were trading hands at 71 cents. As a high-risk, high-reward wager, it seemed a reasonable bet considering the power of the internet and the contrarian thesis of a return to normal.
Fast forward to April 1, and CTRM stock had come almost full circle, with shares priced at 74 cents. Though the contrarian outlook lost some of its punch as declining novel coronavirus cases suggested an economic rebound was likely, Castor Maritime maintained its most valuable catalyst – social freaking media.
Therefore, I was willing to entertain another bullish take on CTRM stock. Look, I saw with the rest of the world what Redditers did to billion-dollar hedge funds. I’d be foolish to say that this crowd has no power or influence, because they do. We’ve become the United States of Reddit and I wasn’t going to become a Benedict Arnold.
In hindsight, maybe I should have. While I can always do without a barrage of hate mail for “wrongthink,” I made a poor call on CTRM stock. On the following session, shares plummeted. Even now, it just looks like a mess – one positive session doesn’t change the bigger picture.
But could a third time be the charm for this socially driven company?
Maybe the Fundamentals Will Matter for CTRM Stock
My InvestorPlace colleague Ian Bezek has a blunt take on CTRM stock, noting that investors should get out of the embattled firm before it capsizes. Fundamentally, he makes a strong argument, particularly regarding the dilution of shares in order for Castor to expand its fleet. Bezek wrote:
“A shareholder that owned 1% of Castor Maritime in 2019 now owns less than 0.01% of the company thanks to its unprecedented dilution. In light of this, the company picking up a few more vessels isn’t remotely enough to make up for the tsunami of new shares that have flooded the market.”
Moreover, Bezek had some commentary on the social media following, noting that Castor’s subreddit r/CTRM has more than 16,000 members, with one thread having more than 66,000 comments.
This leads into a bigger concern — that CTRM stock may not have much support besides coordinated groupthink. And that means that once the crowd gets tired of the trade – and they will – you get more of what just happened.
That may seem like sacrilege to some but it’s the reason why I said you should only play CTRM stock with “dumb money.” You just never know when that threshold might arrive.
Not Enough Firepower
Moving forward, I believe Castor faces two challenges. First, social media may not have the firepower to get CTRM stock back to where it once was. While 16,000 members is impressive, a hedge fund will easily have more spending power to deploy than that entire forum put together. I’m not casting aspersions: I’m just speaking reality.
Second, the economic contrarian narrative may have already been priced into Castor shares. On a related note, there’s a risk that maybe the global economy goes backward again. Although we shouldn’t make a big deal out of this, the latest U.S. jobless claims report came in higher than expected. We still have a long way to go before returning to normal.
Finally, given the fragile state of the global economy, we’re one or two bad events from having serious damage done to us. So for now, the market has spoken. CTRM appeared interesting, but that doesn’t seem to be the case anymore.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.