Buying stocks just because they are rallying is a poor strategy. Meme stocks rallied last week after meme investor Keith Gill posted on X for the first time since the pandemic. AMC soared as much as 308% May 13-14 and GameStop gained 271% to the peak of the same two-day period. But today those gains have vanished almost entirely.
Meanwhile, Robinhood Markets benefited from the spike in retail investing and gained 24% last week, while favored meme social media site Reddit rose 16%. Both stocks, unlike GameStop and AMC, have held most of last week's gains.
AMC quickly gave up its gains last Wednesday after the movie theater company announced an equity swap to exchange 23.3 million newly issued shares for bonds worth $163.9 million maturing in 2026.
Certainly, the one-time spike did not make AMC stock a buy now. AMC's chart does not show the makings of a base that could lead to a breakout and sustained gains. Aside from the short-lived rally, the stock has been struggling below the 50-day moving average since November.
First-quarter results on May 8 did not help the stock, either. Sales of $951.4 million were unchanged from the previous year while a loss of 78 cents per share was an improvement from a $1.31 a share loss a year ago.
On Dec. 19, AMC announced that it was issuing 3.3 million shares to an undisclosed buyer in exchange for $25 million in subordinated notes, a form of debt, that will come due in 2026. The private offering values the stock at 7.47 per share. That is a roughly 50% premium to the current price of around 4.90.
The stock got a boost in September after the company completed a move to sell 40 million shares at an average price of $8.14, which raised $325 million.
The meme stock has IBD Ratings that are well below ideal levels. The Composite Rating is just 12.
Panning out for a longer view, a MarketSmith monthly chart highlights the wild swings that are typical of meme stocks. From a split-adjusted closing price of 11.49 on Dec. 31, 2020, AMC shares hit an all-time high 393.65 on June 2, 2021. That's a gain of 3,326%. But the stock has crashed since then.
Wild swings are a hallmark of a meme stock like AMC.
GME Stock Falls On Earnings
GameStop also is known for volatile movements associated with meme stocks. Shares surged last week amid the brief meme rally but have plunged.
On March 26, shares rallied and rose above the 50-day moving average on fourth-quarter results. Though sales declined 19% to $1.79 billion, earnings rose 38% from the prior year. But the rally did not last.
GameStop's volatility is cause for caution. For one thing, volatile movement provides little support for well-formed bases and buy points.
Further, the stock is down more than 80% from its all-time high 120.75, reached in January 2021.
Going back further, the video game retailer grew an investor fan base in late 2020 at the height of the meme-stock frenzy. By January 2021, the meme stock shot up 1,625% to 81.25, then crashed to 9.63 the very next month.
Investor's Business Daily recommends stock picks based on strong fundamental performance and technical ratings. GME has an IBD Composite Rating of 63, reflecting weak chart action and fundamentals.
Top Financial Soars, Comes Back Down
Top Financial was a perfect example of meme stock volatility. The stock skyrocketed in one day from 48.60 to 256.44 on April 28, 2023 — a 428% gain. It quickly crashed and traded for under 10 by May.
Top stock came public on the Nasdaq in June 2022. The initial offering priced at $5 per share for 5 million shares. Shares popped on the first day of trading, reaching a high of 27.50.
The stock rallied more than 50% in early May last year in meme-like action, then reversed gears and fell more than 70% in a single day. Shares have trended even lower since. The stock is trading around 2.50 a share now. It surged 65% on Feb. 9 and was back to its usual trading range the next day. There was no news on the company.
The Hong Kong-based fintech generates revenue through commissions on trades of equities, futures and options. Its Composite Rating stands at 34.
Is A Meme Stock A Buy Now?
A meme stock is a speculative play, known for high levels of unpredictability because it can rally or crash in any market, and at any time. Its meteoric rises and heart-stopping crashes typically depend on social media hype and online interest.
Hyper stock valuations for these companies depend, for the most part, on young fans and an anonymous following that can appear or disappear overnight. Retail investors dominate the interest in these stocks.
These stocks do not follow traditional investment wisdom, which says you should buy stocks based on earnings growth and performance. As such, they are extremely speculative.
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