Just like double denim, it seems some trends never really die. After flaming out in spectacular fashion last year, the meme stock frenzy of 2021 has made a return.
In recent weeks the share price of troubled retailers Bed Bath & Beyond and GameStop and the cinema chain AMC Entertainment have once again soared.
This may sound all too familiar. Last year all three companies were at the center of a meme-fueled “revolution” in investing as Gen Z and millennial investors piled into the stocks having apparently spotted something Wall Street had missed. GameStop shares rose from $3.25 in April 2020 to $347.50 in late January 2021 – a rise of 10,692%.
Many small investors then felt like they had hedge funds and big institutional investors on the run. Indeed, the frenzy came close to bankrupting a number of hedge funds. It didn’t last. By February the meme stock craze was unraveling and older heads were smugly smiling again.
Now the tide has turned again. Between late July and early last week, shares of Bed Bath & Beyond, a home goods store that has decidedly seen better days, had more than doubled. Movie-theater operator AMC Entertainment saw a similar bounce, while GameStop – the struggling US computer games retail company and perhaps the most baffling of that era’s stock darlings – bumped up close to 25%.
None of the three are considered winning bets in any conventional sense, and the rise in Bed Bath & Beyond came days before its stock was downgraded by the ratings agency Baird. “This frenzied move has been driven by non-fundamentally focused market participants,” Baird analyst Justin Kleber wrote in a note to clients.
This time, the battle may not be between younger day-traders flush with government stimulus checks and informed by online forums like Reddit’s WallStreetBets. Although social media chatter surrounding the stocks has increased, dueling hedge funds are also playing a part.
“Non-fundamentally focused market participants” is an apt way to describe traders at the height of the pandemic meme-stock frenzy. That time around the Reddit board was filled with memes about traders with “diamond hands” – unafraid to take bets against conventional wisdom.
This time too there are parts of Reddit’s investment community that are all in on the rally. Last week a user under the name of TheDude0007 explained on WallStreetBets that “this run is just beginning” and name-checked Ryan Cohen, founder of e-commerce company Chewy and chair of GameStop.
Cohen, known as a “meme-lord” for his influence over investors, was one of GameStop’s original boosters before taking on his chair. His meme-filled posts about him are scrutinized by his fans about him – even when they are almost impossible to decipher. In February last year, I tweeted a picture of a McDonald’s ice-cream cone alongside a frog emoji, sending traders on a search to decode its meaning. GameStop’s stock finished the trading day up 104%.
But according to an analysis by Bloomberg, the meme-stock return is evidence that they have unusually explosive properties. So many investors have bet that the shares in all these companies are worth zero, argues Jared Dillian, editor and publisher of the Daily Dirtnap. But the fact is that – as with any asset – they are worth what people will pay for them. As a result, stock prices of troubled companies can explode upwards at any moment if investors will pay more. “On Wall Street they call trying to profit despite this as ‘picking up nickels in front a steamroller’,” he writes.
According to Ihor Dusaniwsky, managing director at S3 Partners, the movement of the meme stocks is not coming from the Reddit board traders but from larger retail investors and the meme-traders are in a sense along for the ride.
“There isn’t a fundamental reason for a lot of these price moves,” Dusaniwsky told the Guardian. “A lot of it is fomo [fear of missing out] on the rally.”
One clue that this rally is different comes from the last is Robinhood. Once the favorite trading platform of meme traders, Robinhood is in trouble. As stock markets fell and Covid stimulus cash dried up, so did Robinhood’s business. Its number of active users has dropped from 22 million to 14 million, and its stock trades at around $10 after cresting at close to $60 a year ago after it went public.
Last week, Robinhood announced it would lay off 23% of its staff after it posted a 44% decline in revenues. CEO Vladimir Tenev said in a blogpost that the company had been hit by “deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash”.
This time the meme-stock trading is spread across larger trading platforms, including Charles Schwab and E*Trade. That said, Robinhood – and Reddit – still offer clues to why these fundamentally troubled companies are hot again, Dusaniwsky said. “With Robinhood you get an idea of what that cohort of traders are doing and that’s a good proxy for the rest of the market,” said Dusaniwsky.
“It’s really the same type of people – the same mentality. These guys are momentum traders, they’re not looking at the underlying fundamentals. They’re looking at riding the tide in and out, and it’s worked because the market is trending. The problem comes when the market doesn’t trend, and you get taken out to sea.”