Winning bets? The meme stock frenzy of 2021 returns | Stock markets


Much like double denim, it seems some trends never really die. After igniting spectacularly last year, the meme trading frenzy of 2021 has made a comeback.

In recent weeks, the share price of struggling retailers Bed Bath & Beyond and GameStop and movie theater chain AMC Entertainment have once again soared.

This may sound too familiar. Last year, the three companies were at the center of a meme-fueled “revolution” in investing, as Gen Z and millennial investors crowded into stocks after apparently spotting something something Wall Street had missed. GameStop shares rose from $3.25 in April 2020 to $347.50 at the end of January 2021, an increase of 10,692%.

Many small investors then felt like they had hedge funds and large institutional investors on the run. Indeed, the frenzy nearly bankrupted a number of hedge funds. It didn’t last. By February, the meme stocks craze was unfolding and the older heads were smiling smugly 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 seen decidedly better days, had more than doubled. Cinema operator AMC Entertainment experienced a similar rebound, while GameStop – the struggling US computer game retail company and perhaps the most disconcerting of the stock market darlings of this era – rose nearly 25% .

None of the three is considered a winning bet in the conventional sense, and Bed Bath & Beyond’s rise came days before its stock was downgraded by ratings agency Baird. “This frantic move was 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 young day-traders aware of government stimulus checks and informed by online forums like Reddit’s WallStreetBets. Although social media discussions surrounding stocks have increased, dueling hedge funds are also playing a role.

“Non-fundamental driven market players” is an apt way to describe traders at the height of the pandemic meme stock frenzy. At that time, the Reddit board was filled with memes about “diamond-handed” traders – who weren’t afraid to bet against conventional wisdom.

This time too, there are parts of the Reddit investor community who are all on the rally. Last week, a user by the name of TheDude0007 explained on WallStreetBets that “this race has only just begun” and verified the name of Ryan Cohen, founder of the e-commerce company Chewy and president of GameStop.

Cohen, known as a “meme-lord” for his influence on investors, was one of GameStop’s original boosters before taking his presidency. Her meme-filled posts are scrutinized by her fans — even when they’re nearly impossible to decipher. In February last year, he tweeted a photo of a McDonald’s ice cream cone alongside a frog emoji, sending marketers searching to decode its meaning. GameStop shares ended the trading day up 104%.

But according to an analysis by Bloomberg, the performance of meme stocks is proof that they have unusually explosive properties. So many investors have bet that the shares of all these companies are worth zero, argues Jared Dillian, editor and publisher of the Daily Dirtnap. But the fact is, like any asset, they are worth what people are willing to pay for them. As a result, the stock prices of troubled companies can explode higher at any time if investors pay more. “On Wall Street, they call trying to profit despite it like ‘picking up nickels in front of a steamroller,'” he wrote.

According to Ihor Dusaniwsky, managing director of S3 Partners, the meme stock movement is not coming from Reddit’s board traders, but from larger retail investors and meme traders are somehow ready to travel.

“There’s no fundamental reason for a lot of these price moves,” Dusaniwsky told the Guardian. “Much of it is fomo [fear of missing out] on the rally.

One clue that this rally is different from the previous one is Robinhood. Once the favorite trading platform for meme traders, Robinhood is in trouble. As stock markets tumbled and Covid stimulus cash dried up, so did Robinhood’s business. Its number of active users has grown from 22 million to 14 million, and its shares are trading at around $10 after hitting nearly $60 a year ago after its IPO.

Last week, Robinhood announced it would lay off 23% of its staff after experiencing a 44% drop in revenue. CEO Vladimir Tenev said in a blog post that the company has been impacted by “the deteriorating macroeconomic environment, with inflation at 40-year highs accompanied by a broad crypto market crash.”

This time, meme stock trading is spread across larger trading platforms including Charles Schwab and E*Trade. That said, Robinhood — and Reddit — still offer clues as to why these fundamentally struggling companies are back in vogue, Dusaniwsky said. “With Robinhood, you get a sense of what this cohort of traders are doing and that’s a good indicator of the rest of the market,” Dusaniwsky said.

“It’s really the same type of people – the same mentality. These guys are momentum traders, they don’t look at the underlying fundamentals. They plan to take advantage of the rising and falling tide, and it has worked because the market is trending. The problem comes when the market is not trending and you are taken out to sea.”


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