Shares of Redbox (NASDAQ: RDBX), a physical and digital content rental service, gained as much as 23% in the first few minutes of trading on Monday. As of 12:30 p.m. ET, the stock was still up by 17.4%. This type of drama, however, is hardly unusual for Redbox, which appears to have gotten caught up in the meme stock craze.
If you’ve been paying attention to Wall Street for more than a couple of years, you know that when investors’ emotions start to dominate the action around a particular stock, it can lead to unusual outcomes, at least over short periods of time. Over the longer term, the hard facts normally win out. That’s what makes the case of Redbox so interesting. The company has agreed to be acquired by Chicken Soup for the Soul (NASDAQ: CSSE). If all goes as planned, Redbox shareholders will receive 0.087 shares of Chicken Soup for the Soul for every share of Redbox they own.
Chicken Soup for the Soul was trading at $9.44 per share as of 12:30 p.m. ET Monday, valuing its offer for Redbox at a whopping $0.82 per share. Yet Redbox stock is changing hands at more than $5 per share, with Monday’s gain alone nearly as large as the full buyout bid. This is not logical, and it won’t be unless a better offer comes along. But so far, no such bid appears to be in the works, and betting that one will materialize carries serious levels of downside risk should the current deal go through.
Earlier Monday, Redbox’s name found its way onto a list of top short squeeze candidates for August. That may have been a cause of Monday’s early advance, but it doesn’t change the big picture here. Redbox is trading well above the takeover offer it has received even though there’s no particular reason to believe that the deal will be altered in any way. At this point, buying Redbox is little more than a gamble, and most investors should probably avoid it. There are just too many great companies on sale in this bear market to bother with a situation as risky as this.