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Meme Stocks Make a Strong Comeback

Stavros Tousios | Wednesday 15 May 2024

Many  US stocks finished higher on Tuesday, May 14, led by gains in the Nasdaq (NQ) which notched its seventh record close of the year. This may have been driven by investors awaiting the release of the April CPI report (today, Wednesday, May 15).

Notably, the meme stocks frenzy of early 2021 garnered a lot of attention, fueled by “Roaring Kitty's” return to social media last week. His posts have coincided with a surge in GameStop and AMC share prices over the last few days. 

Blackberry (BB) and Reddit (RDDT) also rose, with the latter climbing to its second-highest close since its IPO in March. In addition to meme stocks, other heavily shorted stocks, such as SunPower (SPWR) and Beyond Meat (BYND) also saw their shares rally yesterday.

While the rally may have been reminiscent of 2021, some analysts believe it is unlikely to last long in the current economic environment. Still, many fund managers are awaiting further comments from “Roaring Kitty” to see if this truly marks a possible return of the meme stock mania.

Meme Stocks Make a Strong Comeback

The Meme Stock Evolution

The meme stock frenzy first started in 2020 when Ryan Cohen, GMC’s CEO, announced plans to revive the company. It was fueled by large numbers of retail traders banding together on Reddit to drive up prices of heavily shorted stocks, squeezing hedge funds that had bet against those shares

”Roaring Kitty,” namely Keith Gill, became well known during his influential role in GameStop's short squeeze in 2021, credited with sparking the rally. Keith’s X social media account, formerly known as Twitter, posted again after being dormant since June 2021, catalysing the recent price jumps.

However, some key differences this time may prevent the volatility from reaching the same extremes. For reference, companies now have more shares outstanding, possibly lessening the impact any short squeeze would have. Data shows that only around 30% of GameStop shares are on loan, much lower than almost 100% during the original meme stock frenzy.

Still, many experts note that the moves were based on speculation and hype rather than company fundamentals, showing that the "gamification" of trading may still exist, where traders participate for the thrill. Losses for GameStop short sellers have reached $2.3 billion for the month of May so far. Still, there remains a high risk involved with meme stocks due to their extreme price swings.

Stock Revival or Short-Lived Frenzy

The recent moves in meme stocks were not based on fundamentals but rather on the hype around Gill's return. However, when retail investors last rallied around AMC this way, it helped the company avoid bankruptcy as additional capital raises at higher prices may further support liquidity and debt reduction efforts.

Despite reducing the value of existing shareholders' stakes, the firm actually recently completed a stock sale of $250 million in shares. Experts say that while some of the company’s debt will likely require extending maturity dates, the higher share price may allow securing better deals going forward.

In GameStop’s case, the firm’s revenue continued to fall, and there has been high executive turnover. While its price was up in May following Gill's post, it had fallen more than 35% in the first four months of 2024. Also, short interest in GameStop remains high at around 24% of its float, with GameStop shorts losing over $1 billion on Tuesday alone.

However, retail traders' participation in GameStop and AMC trading has been around 7-10% in recent sessions, indicating that institutions were also involved in the rally. In fact, fund managers want to hear from Roaring Kitty to determine whether this truly marks a return of the meme stock mania. (Source: Reuters)

Conclusion

While GameStop, AMC and other meme stocks jumped this week, the gains were smaller than in 2021. However, past performance does not guarantee future results, and the current meme stock surge may be shorter-lived as analysts expect many short-sellers to exit their positions before retail traders sell. 

Although the rally could benefit some companies and traders in the short term, price reversals may be equally fast. Those who lost money during the previous meme stock frenzy may be reluctant to participate or extrapolate the recent gains of meme stocks into the future as meme stock manias do not last forever and prices often recede sharply after initial price jumps.


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