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Stocks & Options Millennials Should Avoid: Part 1 (HMNY)

|About: Helios and Matheson Analytics, Inc. (HMNY)

Summary

Millennials are attracted to high-risk stocks.

Understanding risk and volatility can help minimize equity loss.

Apply principles of value investing to high-risk strategies for more rational decisions.

If you talk to millennials about the stocks they're most likely to buy right now, two particularly feral beasts come to mind. The first is Helios and Matheson Analytics Inc (HMNY), renowned owner of MoviePass, who saw its shares drop almost 90% from its all time high of roughly $32.90 / share last year. The second is Tesla Inc (TSLA), whose CEO is renowned for his controversial rants on Twitter, almost alien sense of time-effort estimation, and inhuman ingenuity. In addition to these premier choices for pure irrational investing, other popular high-tech and meme stocks include Advanced Micro Devices Inc (AMD), Micron Technology Inc (MU), and corresponding competitors NVIDIA Corporation (NVDA) and Intel Corporation (INTC) (*the latter two being fundamentally solid corporations, in this author's opinion).

It's not surprising that a generation who grew up on technology (having seen its boom, bust, and boom again) and currently suffers full-time job insecurity, believes HMNY and TSLA to be worthy investments. After all, shares of HMNY cost just 37 cents, and Tesla is bringing cars from the future to our homes... soon, hopefully. One can observe a blend of lottery-style YOLO-ing on a cheap opportunity, combined with awe-inspiring enthusiasm for what was previously possible only in science fiction. No matter how relatable these purchase decisions are, however, the fact that they are relatable does not mean they are rational. Even when looking at purchases such as AMD, MU, NVDA or INTC, one must question the bias millennials have in favor of technology stocks vs sectors less familiar to this generation. Fewer millennials may feel compelled to invest in brick and mortar industry or consumer goods, for example.

In this series of articles, we'll examine the various top stocks I feel millennials are most likely to purchase, and why the decisions to purchase them are likely irrational, even if not necessarily bad. We'll also analyze profit potential and alternative strategies more likely to generate income. (Forewarning, I am a medium-to-high risk investor, although I try to base my decision-making on fundamentals, and so my "safer alternatives" will not be ideal for everyone. For less risky investments, you can look into ETFs, bonds, or options hedging strategies.)

For this first article, we'll look at Helios and Matheson Inc (HMNY) and why it's probably irrational of you to buy it.

HMNY's rise and fall has come as no surprise to many investors, but in a world where tech companies with negative EPS receive billions of dollars in funding, it's not infeasible to think the market is simply being irrational... or perhaps, it is often irrational in its valuation of tech stocks, and HMNY is somehow getting unfair treatment. To form a more rational opinion on investing in the stock, we need to evaluate numeric and non-numeric risks: Cash flow and the company's business model, respectively.

It's no secret that HMNY suffers from cash flow problems, with much more of it being negative than positive. While this is not uncommon for startup and technology stocks, HMNY also has a measly $30 MIL market cap and a $21 MIL monthly cash deficit, and only about $15 MIL cash on hand as of this past May. One might wonder why HMNY hasn't already become insolvent. The answer is that it's surviving on what it calls an "equity line of credit", but for the purpose of this article, we'll refer to it as "selling and diluting the stock".

The company has been using a third-party service to evaluate the market on a day-to-day basis and slowly inject more shares into the market to sell in order to keep the company afloat. In fact, one investor suggests HMNY may see dilution of its stock go from its current count of 90 MIL shares of common stock to 300 MIL by the end of summer. At that level of dilution, HMNY's total market cap would have to reach its previous all-time-high just to approach $2 / share. That is to say, HMNY not only needs to survive, but also make a serious comeback in order for the overeager buyer to profit on this low-cost opportunity.

Stock dilution also has another negative side-effect: If HMNY had a legitimate "equity line of credit" other than the dilution of its shares, it could potentially outlive short sellers of the stock and cause a squeeze, which would then lead to a rebound in its price. As it stands, while HMNY stock is expensive to short and this squeeze could still occur, a short squeeze is unlikely to happen or have substantial impact if HMNY continues to dilutes its shares.

In addition to looking at the raw numbers, we should do our due diligence as value investors and consider HMNY's MoviePass business model. One might expect a company giving out unlimited movie tickets for $9.99 / mo at such a large scale to have some sort of inside relationship with movie theaters. If that was the case, then HMNY could work with them directly to leverage a full host of efforts ranging from data tracking and analytics, to marketing, to sales, etc. etc. Even if they were not working with internal teams, some sort of affiliation or partnership could lead to more favorable costs or even a purchase of HMNY by a billion-dollar theater chain such as AMC.

As it stands, this is not the case. HMNY pays the theater for every single ticket - in cash. With a $9.99 / mo subscription price and an average $12 / ticket price, going to see even one movie / mo costs HMNY more money than it receives from your monthly subscription fee. If that sounds bad, it gets worse. Not only does HMNY not have an idealized inside relationship with a large movie theater chain such as AMC, it seems to have a relationship with negative outlook, with AMC executives shunning the MoviePass business model and the subscription cost vs ticket cost price gap. While HMNY asserts that it is currently responsible for a large portion of AMC's revenue, it is unclear whether the impact of MoviePass is enough to make AMC feel obligated to care.

All being said, we can see why spontaneous purchases of HMNY stock by people assuming it's some kind of overlooked bargain deal is probably irrational. (I am being very lenient here.)

That does not mean the idea to purchase is necessarily bad, just that most millennial investors are not likely accounting for all of the risks - including the possibility of your investment being zeroed out entirely because of bankruptcy.

Looking on the positive side, HMNY is a data analytics company ran by executives with a good track record. They have a loyal subscriber base, which might help give them the sort of "moat" Warren Buffet likes to talk about. If HMNY can sufficiently leverage their data analytics and subscriber base to produce additional revenue-generating activity, then they very well may end up in good form. Unless one knows HMNY's next move, however, one can consider this possibility far less certain. Now that you better understand HMNY's risk factors, the remaining question for you the investor is, how much risk are you willing to take, and to what end?

Options

Now for the fun part... should you be willing to stake a long position in HMNY, what sort of profit outcomes can you reasonably seek to acquire?

One option would be to buy shares of HMNY for 37 cents a piece, 1000 of which would expense you roughly $370 plus fees - unless you, like many millennials, opt for Robinhood as your broker of choice. If HMNY's market cap should immediately bounce back to its all-time-high of $316 MIL, you'd end up a stock price of about $3 / share, making your 1000 shares worth $3000... almost 8x profit overnight.

Also worthy of note: if HMNY survives and remains on the stock market, you are unlikely to lose your money, although you aren't promised to see these astronomical gains, either. In other words, even if you "lose", you might still be able to get your money back.

While that might seem exciting, considering HMNY's definitely non-zero probability of going bankrupt, I don't see much of a difference between a long stock position in HMNY vs buying far expiring options - except for cost and profit potential, which in both cases options win:

For example, if you wanted to instead place $370 of your money into Jan 2020 calls in HMNY, you can currently get 100 HMNY Jan 17, 2010 @ $0.05 / share call options for a mid-price of $0.18 / option. That's $18 for 100 shares, the size of a single contract, which would allow us to leverage potential ownership of roughly 2100 shares of HMNY instead of 1000 shares when buying stock. Given similar conditions to our example above, we would end up with a 16x rise in the value of our position (or more) should HMNY's stock price suddenly rise.

Mind the fact that options are more complicated than this, and you should really learn the Greeks if you want to start buying them. For simplicity purposes, however, we're assuming our options upon sale are priced purely on intrinsic value of the underlying stock. In practice, options come with a premium as well as being impacted by other factors such as implied volatility. That being said, one can assume that if the price of HMNY stock was to suddenly spike, option prices would spike as well, and we could potentially see higher than 16x gains. (If HMNY's stock price takes too long to spike, we might see those additional gains cut short by theta/time decay. Seriously, learn the Greeks.)

Conclusion

We'll end today's adventure with the above summarized potential of HMNY calls. I hope this article gave you some perspective on HMNY as a whole, as well as offering some entertaining speculation on your potential lottery earnings. To learn more about value investing or options in particular, Seeking Alpha has good articles on these topics.

In the next article, we'll explore Elon Musk's baby from an electric future, Tesla Inc (TSLA), which has far more expensive options than HMNY ($1400+ / contract) as well as higher price volatility. Overall, TSLA is interesting to evaluate both as a long-term investor and short-term options trader. Looking forward to seeing you.

Questions, comments, criticism? Leave your thoughts in the discussion below.

Disclosure: Author holds calls in HMNY mentioned in this article.

Disclosure: I am/we are long HMNY.