From GameStop to AMC, “meme stocks” have become an overnight sensation in global stock markets. These Internet forum-driven stocks have attracted new retail investors into the market and left many hedge fund managers scratching their heads, as they try to tackle this new investment phenomenon. But what exactly are meme stocks and are they here to stay?
They first came to prominence in January this year, when US video game retailer GameStop (GME) soared 1,900% in under a month, propelled by Reddit forum r/wallstreetbets and other online retail investor communities. This humbled a number of professional hedge fund investors who were positioned aggressively for the share price to fall, and highlighted the rising power of retail investors who could no longer always be seen as the investment underdogs. GME’s share price then fell 90% nearly as quickly as it rose as retail investors moved on to other stocks.
Since then the investor community following these stocks has only grown.
- Worldwide Google searches for ‘meme stocks’ are now more than double January’s levels. Similarly, the r/wallstreetbets investor community has over 10.5 million subscribers, more than five times the amount at the beginning of the year.
- Our very own eToro site shows GME with more followers than much larger stocks such as the US’s largest oil company Exxon (XOM) and largest bank JP Morgan (JPM) combined.
- Meme stocks have recently come back to prominence and with more stocks involved. Our 15-stock MEME index has risen over 50% in the last month, with the mainstream S&P 500 index up only 3% by comparison.
What makes a meme stock?
- A large social following: The word ‘meme’ itself is far from new and can be traced as far back as ancient Greek, where it meant ‘imitated,’ although it was made popular by Richard Dawkins in his book, The Selfish Gene. Today, we see these ideas being communicated, discussed, and analysed, across online investor forums, from the 10.8 million subscribers on r/wallstreetbets to our own eToro social investment network and others. This democratisation of investment and growth of community has been catalysed by commission-free trading, fractional share ownership, and online analysis tools.
- Out-of-favour: These meme businesses are often struggling or trying to implement a turnaround plan. This often means they have few or no profits today, and that many professional investors are ‘shorting’ them, i.e., trading in the belief that their share prices will fall. GME, for example, has reported no profits for the last three years and in January, investors were ‘shorting,’ or trading against, over 100% of its shares.
- Well-known smaller brands: Meme stocks are usually smaller, consumer-facing companies that are well known to many investors. They are often present in the shopping mall, such as GME, cinema operator AMC Entertainment (AMC), or retailer Bed, Bath & Beyond (BBBY) or known for once selling well-known tech products, such as Blackberry (BB) and Nokia (NOK). For example, GME had a stock market value of a little over US$1 billion before its January price spike, making it a minnow versus large caps like Apple, with stock market values of two thousand times more at US$2 trillion.
This combination of small, often struggling brands, supported by large online investor followings, leads to the final key meme characteristic: - Share price volatility: Smaller companies are normally riskier than larger companies, with less diversification or resources. In addition, the lack of profits makes traditional company valuation measures difficult. Rational investors will also often disagree on the outlook for the success or otherwise of turnaround plans. Also, a sharply rising share price will force those trading against a company to have to actually buy the shares — pushing its price up even further. These ingredients all combine to make so-called meme stocks a lot riskier than many other stocks in the market, with much greater share price ups and downs than usual.
What does it mean?
Recent weeks have seen the meme stock phenomenon return, with more stocks involved now, with more retail investors following online, and with these stocks posting share price returns well above broader indexes. However, the focus on smaller and riskier companies and their huge share price volatility means investors need to be very careful. Investors should always educate themselves on the investments and their risks, and be diligent about diversifying across multiple stocks and asset classes.
Meme stocks are here to stay
The rise of the retail investor was initially written off as a lockdown-driven one-off. We disagree, for the following reasons:
- The foundations are structural and predate lockdowns, with the growth of online investment communities, online analysis tools, and the introduction of commission-free trading and fractional share ownership.
- Retail engagement has continued to rise, not fall, even as the world has started to reopen. Subscriber numbers on investment platforms, including eToro, are expanding rapidly, while markets are seeing increased retail fund inflows, and increasing imitation, with exchange-traded funds now being launched* to try and mimic retail investor strategies.
- The meme stock phenomenon is broadening and developing, seeing a recent new resurgence, involving more stocks, and with less reliance on stocks with very high short interest ratios (percentage of shares sold ‘short’). Retail investors are also getting some credit for seeing value early in stocks where institutional investors did not, such as the car rental firm Hertz (HTZGQ) which is now exiting bankruptcy with its equity value intact and after a bidding war among investors.
Retail investors have developed a unique ‘meme stock’ investment strategy, all their own, leveraging a growing online community and new investment tools to invest in smaller, out-of-favour consumer stocks, and to increasingly challenge institutional investors. This is why, we believe, meme stocks are here to stay.
* VanEck Vector Social Sentiment (BUZZ) and Tuttle Capital Fear Of Missing Out (FOMO) ETF’s