Superconductor Stocks’ Wild Swings Are Getting Risky

Recent excitement around all things superconductor has sent shares of companies deemed related to the technology on a rollercoaster ride. If history is any guide, this is a stock wager fraught with danger.

(Bloomberg) — Recent excitement around all things superconductor has sent shares of companies deemed related to the technology on a rollercoaster ride. If history is any guide, this is a stock wager fraught with danger.

An army of day traders sparked huge rallies in several Korean and Chinese companies linked to superconductors before leaving them reeling about two weeks later. Sunam Co. and Duksung Co. surged over 300% and 200% since late July, respectively, before wiping out about half of the gains. Similar moves played out in China’s Jiangsu Fasten Co. and Jiangsu Etern Co.

Their rapid rise and fall is a stark reminder of the risk that retail investors pose: they can crash a stock as fast and as furiously as they can boost them. That leaves those late to the cycle nursing losses when the party abruptly ends.

“Depending on how you trade, investors can go back and forth between heaven and hell as they show huge swings even within the same day,” said Cho Junkee, an analyst at SK Securities Co. Until there is a real verdict on the validity of LK-99, the stock moves will continue to be swayed by news flows, he said.

Superconductors were thrust into the spotlight this month after a team of Korean scientists said they discovered a material, dubbed LK-99, that can transmit energy without any losses at room temperature. Retail investors shrugged off warnings from market regulators and even the companies themselves, who said they have no direct links with the study, to pile into these stocks. 

That helped ignite buying in the likes of Sunam, Duksung and Mobiis Co. that pushed the stocks into technically overbought territory, with their relative strength indexes hitting record highs in the past week. That suggests the gains could be excessive and in danger of unwinding.

But enthusiasm in these stocks may have peaked after multiple institutions found that LK-99 doesn’t possess the vaunted superconducting capabilities. That has prompted short sellers to ramp up bets on declines in American SuperConductor Corp., which saw short positions surge to 10.7% of its free-floating shares from almost zero at the end of last month, according to data from IHS Markit.

There are other such traps for market participants. Jiangsu Fasten and Henan Zhongfu Industry Co. saw shares spike and then promptly slump after the companies clarified they weren’t conducting any research on superconductors. 

The wild swings hark back to previous meme stock crazes, like those in GameStop Corp., AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc., which collapsed after multi-fold increases. Losses from the height of rallies like these can be swift and painful. 

But for those brave enough to stomach the volatility, there are potentially big wins. During the US meme stock saga of 2021, day-traders helped bid up many of these shares to new heights, including a more than 5,000% year-on-year increase for GameStop that helped line the pockets of investors. The current frenzy taking over Korean battery stocks — which has also been powered by the retail army — is still holding strong. 

“The idea of room-temperature superconductors will continue to lure speculative trades,” said Kenny Wen, head of investment strategy at KGI Asia Ltd. “But I don’t see fundamental earnings boost for any related companies. It’s just a hope.”

Tech Chart of the Day

Shares in Nvidia Corp. have retreated about 13% in August, putting it on track for the stock’s worst month this year. Morgan Stanley analyst Joseph Moore noted that the recent weakness in the stock is a good entry point ahead of the chipmaker’s second quarter earnings report, which is slated for next week. The Santa Clara, California-based company’s shares, which were were still up 177% this year, edged higher on Monday. 

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–With assistance from Subrat Patnaik and David Watkins.

(Updates to add stock move in Tech Chart of the Day section.)

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