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Are meme stocks making a comeback? This article explains how to invest in meme stocks.
The leading figure of American retail investors, "Roaring Kitty" has posted again!
What happened: Roaring Kitty published an image adapted from the cover of Time magazine, which appears to be a modified version of the December 25, 2006, cover that named "YOU" (referring to the American public) as the "Person of the Year."
What impact has this had: This post did not include any explanatory text but quickly sparked widespread attention and speculation among day traders, with related Stocks generally experiencing a surge.
Unity Software (U.US) and Clear Secure (YOU.US) have gained attention due to their stock codes being associated with "YOU". Unity saw an intraday high increase of 8.2% and closed up 4.9%; Clear Secure partially recovered from earlier losses, ultimately down 1.1%. As one of the iconic MEME Stocks, GameStop (GME.USIts stock price once soared by 14%, then retraced most of the gains, ultimately closing up by 5.9%. Another popular stock during the same period, AMC Entertainment (AMC.US) also experienced a similar trend, closing up by 5.9%.
I believe some mooers still do not understand what Meme Stocks are. How are they being hyped? Are these stocks worth investing in? How long can the hype around Meme Stocks last?
In this article, we will discuss in detail, interested mooers can also jointhe official Learn group of Futubull>> to learn the latest investment strategies in real-time.
What is a MEME stock?
First, let's talk about what MEME stocks are.
MEME stocks refer to the company stocks that have gained a lot of attention from retail investors on online and Social Media platforms, including Reddit, Stocktwits, Twitter, and Facebook.
These meme stocks that are popular among retail investors generally have the following stories:
The company's fundamentals are weakening, and the stock price is stagnant;
They are being heavily shorted by hedge funds;
But recently there have been some signs of a turnaround.
When a stock becomes a hot topic on social networks, it attracts retail investors to buy in frenzy, driving the stock price to surge sharply in a short period, thus creating another Meme stock.
In fact, the formation of meme stocks can be seen as a battle of wits and courage between retail investors and Wall Street big players. Retail investors continuously drive up stock prices, while hedge funds keep shorting them. This leads to particularly volatile stock prices for meme stocks, experiencing wild fluctuations in a short period.
The characteristics of meme stock prices can be summarized in the following three points:
The heat on social media is particularly high.
Stock prices fluctuate super quickly in the short term. Compared to traditional stocks that increase by 30% to 50% in a year, meme stocks can achieve the same increase in just a few hours or days.
These stocks lack business fundamentals, performance, or prospects, so after a price surge, they might be seriously overvalued.
Case analysis of meme stocks
One of the most famous examples of meme stocks is GameStop (NYSE:GME).
This is a struggling physical retailer of video games that meets the necessary conditions to become a meme stock:
The company is in trouble. GME has been impacted by online retail and the pandemic, with its business declining, weakening its fundamentals, and its stock price once falling into a low period.
Stocks are highly shorted. Due to the long-term decline in stock prices, many Wall Street Institutions have been attracted to short them.
There is a story of a turnaround in adversity. At the end of 2020, a billionaire investor named Ryan Cohen, founder of the pet user website Chewy, announced his stake in GameStop and joined the board.
In fact, as early as August 2020, a YouTube influencer named RoaringKitty (also known as Keith Gill) mentioned in a video that GameStop's stock price could rise from $5 to $50. He saw GameStop's stocks being heavily shorted, and in this situation, if the stock price skyrocketed, it could trigger what is known as a "short squeeze," leading to further increases in the stock price.
This attracted the attention of retail investors towards GameStop in the Reddit forum r/wallstreetbets. Soon after, Ryan Cohen joined the GameStop board, which convinced retail investors even more that the stock was undervalued, causing them to buy in.
In January 2021, driven by retail investors, GameStop's stock price skyrocketed from around $20 to a peak of nearly $500 in just a few weeks, delivering a serious blow to the shorts.
However, the crazy surge in GameStop's stock price led to it severely exceeding the company's true value, resulting in just a month later, the stock price crashing from $500 to $50.
In addition to GameStop, there are several classic cases of Meme stocks. Here is a list of some popular Meme stocks:
The price lifecycle of Meme Stocks.
The price trend of MEME stocks typically undergoes a complete lifecycle, from skyrocketing to plummeting.
Reddit users have observed and divided the lifecycle of MEME stocks into four stages:
Early adopter phase: Some investors discover that the stock is undervalued and begin to Buy at the current price. During this stage, the stock price may remain stable or rise slightly.
Middle phase: As the first wave of rapid increase begins, trading volume surges. More investors notice it and join in purchasing.
Late/FOMO Phase: The stock goes viral on Social Media and platforms. Many retail investors flood into the market, fearing they might miss the opportunity (FOMO). This sentiment continues to drive the stock price up.
Profit Taking Phase: When the stock price peaks, the earliest investors begin to Sell, making substantial profits. Mid-term investors also realize that smarter individuals are selling, and they follow suit, triggering a chain reaction. The sentiment shifts from fearing to buy too slowly to fearing to sell too slowly. However, in this phase, the stock price will not drop to the bottom immediately; there will still be some rebounds, but eventually, it will return to normal stock prices.
It is important to note that these stages can occur within a few days, so mastering market timing is crucial. When making investment decisions, it is essential to manage risks adequately.
The risks of Meme Stocks
Meme stocks may provide investors with opportunities to earn high returns in a short period. However, behind the high returns lurk high risks. The risks associated with meme stocks mainly include several points:
Stock prices decoupled from fundamentals: The prices of meme stocks often bear little relation to the company's fundamentals, which leads to significant price fluctuations, making it difficult for investors to accurately predict future trends.
Short-term supply and demand impacts: The prices of meme stocks are primarily influenced by supply and demand relationships in the short term, making price trends hard to predict and understand.
Social media sentiment: Meme stocks are greatly influenced by social media sentiment. Once retail investors' attention shifts to other stocks, previously favored meme stocks may suffer a sharp decline.
Therefore, some people believe that investing in meme stocks is more akin to speculation rather than traditional long-term investing.
So, should ordinary investors avoid meme stocks altogether?
Jeremy Siegel, a professor at the Wharton School and a well-known economist, believes that investing in meme stocks is acceptable, but the proportion should not be too high.
It is suggested to allocate 10% or 15% of the funds in the investment portfolio to Meme Stocks, while the remaining 85% should be invested in some index-based long-term Funds, making the investment more meaningful and stable.
It is emphasized not to let Meme Stocks occupy a large proportion in the investment portfolio unless there is excess cash available and the ability to withstand significant losses.
How to identify Meme Stocks.
If considering investing in Meme Stocks but unsure how to identify promising Meme Stocks, one might want to pay attention to the following four points:
1. Pay attention to Social Media buzz.
The most notable feature of Meme Stocks is their high level of discussion on social media.
You can observe the currently discussed Stocks through the SwaggyStocks website.
Here is the list of the most popular Stocks as of August 2, 2023.
2. Pay attention to the Short Interest of the Stocks.
Additionally, another feature of MEME stocks is that they are highly shorted.
Investors can assess whether a company is heavily shorted by using the Short Interest ratio as an Indicator.
Generally speaking, if the Short Interest ratio is greater than 40%, it indicates that the stock is heavily bearish.
Take used car company CVNA as an example. In January 2023, the Short Interest ratio of the company's stock reached as high as 52.47%, remaining above 40% in the following months.
This indicates that if the stock price rises sharply, it could lead to a short squeeze, further driving the stock price up.
3. Look for turnaround stories in adversity.
Retail investors love Meme stocks with comeback stories because it suggests that the company's fundamentals are improving.
Continuing with CVNA as an example. According to The Motley Fool, in 2023, CVNA is experiencing a phase of adversity reversal.
In 2022, due to declining used car prices and the Federal Reserve's interest rate hikes, there was a negative outlook on CVNA, resulting in a sharp decline in the company's stock price.
However, by 2023, the situation has changed. On May 4, the company released its first quarter earnings report for 2023 and the expectations for the second quarter, giving investors signs of a business rebound. This attracted more retail investors' attention to the company.
4. Identifying the lifecycle of stock prices
The stock prices of meme stocks are highly volatile and can change rapidly. If the stock price is already in the later stages or profit-taking stages, it may be severely overvalued. Buying at this time may pose significant risks.
In summary
Meme stocks are those stocks that are popular among retail investors on social media.
They are characterized by extreme price fluctuations, which can lead to high returns in a short period. However, the risks are also high, as the stock price disconnects from the fundamentals and is influenced by social media sentiment.
Investing in meme stocks can be attempted, but the proportion should be moderate, and rational investment is the best strategy.
Observing the popularity on social media and short interest, looking for stories of adversity reversal, and identifying the stock price lifecycle are ways to recognize potential meme stocks.
