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Jim Cramer On GameStop And AMC Stock: "Buy What You Know"

MadMoney host Jim Cramer recently advised GME and AMC investors to buy only what they know. Here, we’ll take a closer look at Jim’s message.

It's news to nobody that the relationship between the GameStop and AMC shareholder communities and Jim Cramer is not the best. Jim Cramer is seen as a kind of nemesis to meme stocks due to his history of warning about the risks involved in trading them, which are often interpreted by the “ape” community as FUDs (fear, uncertainty, and doubt).

Recently, the Mad Money host stated that new investors, especially millennials who have heavily invested in meme stocks, should know about what they’re investing in before buying in.

(Read more from Wall Street Memes: Nokia Stock: Could The Meme Saga Repeat In 2022?)

“Buy what you know.”

Coming up on the one-year anniversary of GameStop's historic short squeeze, Cramer believes that hedge funds have mostly moved on and that meme companies will once again start trading according to their fundamentals.

Cramer also said that if GME and AMC investors knew how to read these companies' balance sheets, they would most likely not buy their shares.

"There's nothing wrong with making money legally, but I think it's a bad strategy to buy stocks that you don't understand or don't care to understand," he said, referring to GameStop and AMC investors buying shares based on their meme value and/or short squeeze potential rather than the underlying companies’ fundamentals.

“CEO Adam Aron warned that it was time to sell AMC.”

Earlier this year, AMC CEO Adam Aron said that he had finalized his plan to sell more of his AMC shares. In August, Aron had already announced that he was aiming to sell a portion of his shares - he indeed ended up selling about $40 million worth.

Given the wildly meme-ified share price that AMC was experiencing at the time, had CEO Adam Aron had not sold his shares, it would have been akin to winning the lottery but not claiming the prize.

Mr. Aron had a right to sell his shares, and doing so seemed more than reasonable, especially since the CEO had always been transparent with AMC shareholders about his plans and in fact saved AMC’s business from bankruptcy by issuing more shares.

According to Jim Cramer, AMC shareholders should have had the wisdom to see the CEO's warnings as a sign to sell their own shares at record highs. Not only was the CEO cashing in for himself, but he appeared to be in desperate need of capital to keep his company alive.

"Box office numbers were horrendous, down more than 55% from pre-pandemic levels. You had to get out while their getting was good, and he [Mr. Aron] told you when that was by his stock sales.”

Jim hopes that in the future, AMC's business, infused with new capital, will be able to hang on and even thrive.

“It is hard to justify the investment in GameStop based on its fundamentals.”

According to Cramer, GameStop has always been even harder to justify investing in, mainly because, he believes, it is an outdated video game retailer trying to do business in an increasingly online world.

Ryan Cohen, co-founder and former CEO of Chewy, was expected to provide a course correction to GameStop when he was appointed Chairman. But although GameStop, at least partially under Cohen’s direction, has moved to get involved in the buzzy crypto and NFT spaces, the company has not seen significant improvements in its fundamentals yet.

According to Jim, if GME investors went into brick-and-mortar GameStop stores and saw how old-fashioned they are, they would have a rude awakening (of course, many retail GME investors probably have been to GameStops). Jim says that shareholders should have taken their win after beating out the shorts the first time, in January of 2021, but instead, they have stuck to the same playbook for over a year.

The bottom line

Jim Cramer's arguments play on logic - i.e., investors should buy assets that generate value, based on their fundamentals. However, meme stocks often defy logic. And share ownership can take on a symbolic, rather than fundamentals-based, value.

The fact remains, though, that GameStop and AMC, having experienced massive drawdowns since their meme boom, have big challenges ahead of them if they are to reach new highs, especially if they lack the catalysts they had last year. 

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)