Meme-stock investing is back.
Those stocks are ones that develop huge followings through social media. The phenomenon began in late 2020, and the most prominent examples were two beleaguered companies that hedge funds had heavily sold short.
They are videogame retailer GameStop (GME) and movie-theater chain AMC Entertainment (AMC) .
GameStop suffered because its brick-and mortar stores were turning obsolete in an online world. AMC was hurt by dwindling audiences, who also found their entertainment online and who stayed away from theaters during covid.
The most famous of the Internet influencers was Keith Gill, known by his Twitter (now X) handle Roaring Kitty.
He pushed GameStop shares hard on Twitter, Reddit and YouTube. And he was effective. In January 2021, GameStop soared almost eightfold in three weeks.
SOPA Images/Getty Images
The GameStop surge led retail traders to snap up shares of other troubled companies, too. AMC more than quintupled from early May to early June in 2021.
Reality then struck and shares of GameStop and AMC fell back, though GameStop has remained above 2020 levels.
The dicey fundamentals of GameStop and AMC
GameStop has made some financial progress, with profit of $6.7 million in the year ended Feb. 3, compared with a net loss of $313.1 million a year earlier. Net sales slid 11% to $5.27 billion from $5.93 billion.
Related: GameStop surge continues, with AMC in tow, amid 'Roaring Kitty' meme rally
As for AMC, for the first quarter of 2024 it reported a net loss of $163.5 million, narrowing from $235.5 million a year earlier. Revenue totaled $951.4 million, little changed from $954.4 million for Q1 2023.
These fundamentals hardly seem to justify much of an upward move by the stocks, but that’s exactly what has happened.
On Sunday, Gill (Roaring Kitty) posted an image on X of a man with a device in his hand, leaning forward in his chair. That’s a meme videogame players deploy when the action gets intense. He also posted a three-year old video on YouTube explaining his bullishness on GameStop.
— Roaring Kitty (@TheRoaringKitty) May 13, 2024
That was enough to do the trick. Both GameStop and AMC have more than doubled over the past two days.
What does it say when assets of questionable worth skyrocket without a change in fundamentals? Think dot.com stocks in the late 1990s and subprime mortgages in the mid- to late-2000s.
Investors’ animal spirits get out of control, pushing asset prices to vastly overvalued levels. Markets can plunge in response. That doesn’t mean they’re going to stumble anytime soon. But be wary.
Hedge fund managers sound alarm over meme stocks
Some top investors have reacted negatively to the return of meme-stock euphoria.
“It’s bewildering,” the legendary hedge fund manager Boaz Weinstein, founder of Saba Capital Management, told CNBC.
“When you see something that’s up 100% and you don’t know why, it feels great because it’s up for those who have it. But it makes a mockery of the challenge of investing.”
Related: GameStop surge continues, with AMC in tow, amid 'Roaring Kitty' meme rally
Bottom line: “It can’t be justified on anything other than pure speculation. I don’t want any part of it,” he said.
The veteran hedge-fund investor Doug Kass, a commentator for TheStreet Pro, also expressed skepticism. “Foolish squared!” he wrote above a Roaring Kitty tweet, presumably forecasting that this meme-stock rally will end in smithereens, much like the last.
Also, “the harder they come, the harder they fall,” Kass wrote in a discussion about GameStop and AMC.
Fund manager buys and sells:
- Cathie Wood buys $22 million of battered tech stock
- Fund manager of $100 million long/short mutual fund explains pair trade strategy
- Goldman Sachs revamps conviction list after stocks soar in Q1
Short-sellers bet against a company by borrowing shares and selling them. If the price of the stock declines, the short-sellers will buy back the shares at a lower price, return the borrowed stock (while paying a fee), and pocket the difference.
But the 2020-2021 meme-stock rally was a short squeeze. That means investors who were short the stocks’ shares had to buy them back to cover losses as the share prices rose.
And this time around investors can’t borrow GameStop and AMC, Kass noted. “This is a buyers squeeze and not a short squeeze, which has more dire market implications.”
He also offered solace to rookie investors caught in the meme-stock net. “Imagine spending four years of your life studying efficient market hypothesis, only to see a GME rip 100%, … because some guy who calls himself roaring kitty tweeted a meme,” Kass said.
Related: Veteran fund manager picks favorite stocks for 2024
