The ‘Meme’ Stocks - The Revolution Or A Revolution?

Ticker Symbols:- Reddit Inc. (RDDT) - $62.23, GameStop Corp. Class A (GME) - $23.86, AMC Entertainment Holdings, Inc. (AMC) - $4.34, BlackBerry Limited (BB) - $2.95

What Are They Really?

Meme stocks refer to a select few that gain sudden popularity through social media and can lead to sky-high prices and unusually high trading volumes of these stocks. The popularity of meme stocks is generally based on internet memes shared among traders, on platforms such as Reddit's r/wallstreetbets. With the type of investor quite varied but largely retail, the experience of such investors tends to be quite limited and this already draws our first criticism of these types of investors and the rallies they participate in.

The Incredulous Value Proposition

Now, we already know what a ‘short squeeze’ is but for those that aren’t aware of it, this is a situation in which the price of a stock rapidly increases to such an extent, that investors who would have sold short, purchase the stock at the inflated price in order to limit their losses, causing the price to rise even further, ignoring underlying fundamentals.

The most famous of this phenomena, being the January 2021 rally that was largely influenced by ‘Roaring Kitty’ or ‘DeepF%#$*kingValue (DFV) on Reddit, whose name is Keith Gill, through the r/wallstreetbets subreddit. However, it has to be noted that a number of hedge funds also participated in this short squeeze.

At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over $500 per share ($125 split-adjusted), nearly 30 times the $17.25 valuation at the beginning of the month. There was some controversy that followed on the day with some brokerages halting trading, but we won’t get into that.

The idea that a stock price shot up by a whooping 2798% is insane!!! And, that is where the real value of this phenomena is. With more short sellers having to close their short positions, either to limit their losses or because of an even worse causality in the form of a margin call. The buying back of the stock when exiting these short positions, further pushes the price of the stock up, furthering the vicious cycle and compounding losses for short sellers, with the antithesis being profits for the investors that went long on the stock.

The Revolution Returns

At the time of this article, we just came from witnessing another monster rally on GME that saw short sellers losing almost $1 Billion on Monday the 13th of May 2024. The share price rose from $17.46 on Friday’s closing price and by the end of Monday, had gone up to $30.45. Talk about a good day at the office for retail investors.

Now, this trend continued into the next trading day, with share volumes, again, as if we didn’t see this coming, forcing brokerages to suspend trading, with some pausing trading as many as x9 times on just Monday morning trading volumes.

The question a neutral trader might be hounded by, would be, what may have started this rally? And to answer that, we look no further than a post on by none other than, you guessed it, ‘Roaring Kitty’ which was a meme of a gamer sitting up to a ‘time to get serious’ posture, which I’m sure any gamer worth their salt, has sat up to this posture. Little did we know, it could cost short sellers close to a $1 Billion in the hands of certain ‘meme meister’

Valuable Perspective

AMC and BB stocks, also soared as they are considered typical meme stocks themselves at the writing of this article closing off at $4.34 and $2.95 respectively. Largely, on the news that it’s fellow GME was on the rise again.

We tend to shy away from being rather opinionated in my articles but we will make an exception here. We wouldn’t go on the side of the ‘meme brigade’ for reasons that we will only state one of, though there are a couple. There are too many fundamentals that go against the sustained market performance of GME, that any prudent technical or fundamental analysis may debunk viable reasoning as to why this hype train is even on the tracks.

Apart from that, it would be quite interesting to see what happens to the short sellers if the ‘meme brigade’ continue to have their way into next weeks’ trading. But as the late great Charlie Munger once said, "the big money is not in the buying and the selling, but in the waiting." So ,I’m going to be sitting by the bleachers and waiting, patiently waiting.

Posted in Stocks on May 30, 2024