You hear it frequently - meme stocks are social hype; they rely solely on rapid popularity changes and will eventually correct from their fundamentals, avoid at all costs. Often perpetuated by many in the investment field, this unfortunate misdirection isn’t predicated on fundamentals. Why, then, are they mentioned? I’m not the first to say this, but meme stocks have great potential; these businesses are legit corporations – yet opinions about these businesses have varied widely since 2021.
Meme stocks defy convention, standing out as a unique and intriguing phenomenon in the stock market. Yet, they are often dismissed and scorned, likened to a unique roulette wheel in a casino with similar odds. While the investing meme crowd did indeed spring from a place of curiosity and crowd enthusiasm, the underground movement universe evolved from a more astute and historically significant origin.
Meme stocks are, first and foremost, legitimate businesses that are labeled with a pejorative moniker. This label stems from a business’s rapid and heightened adoration from social sentiment. Viral popularity follows as media platforms share data about a particular business; this usually garners a large following of retail traders to invest, creating noticeability and, subsequently, a potentially large price swing.
As one might surmise, meme stocks were a product of necessity. The societal changes that confined people to their homes during the great lockdown in 2021 gave rise to various subreddits as communities scrambled to find entertainment and engage in new digital trends. These changes sparked a new era in stock trading, one that was driven by the collective enthusiasm and curiosity of the masses.
The term “meme stock” was first coined on a Reddit page established by Jamie Rogozinski in 2012. This subreddit, a hub of stock trading discussions, was a hotbed of activity. It was a place where advice was freely exchanged, topics were diverse, and strategies for short-term gains were a recurring theme. This was the birthplace of the meme stock movement. While numerous financial pages existed on Reddit, none were as influential as “WallStreetBets.” This forum, where retail traders congregated to discuss market positions, business dynamics, and rapid changes in prices and volume, played a pivotal and enlightening role in the ascent of meme stocks and the heightened interest in the stock market among a new generation. The advent of digital investing applications further revolutionized the stock market, making it more accessible and transparent for retail traders.
Digital Applications:
From a historical point of view, Wall Street has always been seen as a special place - a mythical plain of existence where billionaires would trade their shares of companies with others, acquire new assets, and possibly take over an independent country with sheer economic wealth. Like many assumptions in online forums, few were correct. One accurate assumption within the Wall Street mob was that small money types are overlooked and disregarded. There wasn’t a voice for the retail crowd, and there hasn’t been until mobile technology changed that.
The concept of brokerage investing was unfamiliar to most Gen Xers and Millennials; much like the saying, never spend money before you have it - it was considered an aphorism of our parents. A financial concept we should abide by but with what means? As was the fiscal environment at the time, investing money for retirement or purchasing a house seemed unattainable, especially in an era of hyperinflation and reckless government spending. Where does financial success come into play? How can anyone obtain financial success similar to our parents in the 60’s and 70’s? Enter the WallStreetBets forum and the advent of digital investing applications.
The story of Reddit’s WallStreetBets is purpose-created. It is a gathering of new stock traders, a haven for the average retail investor to participate in the stock market without using a cumbersome brokerage or the need to discuss trades with another entity. This congregation of like-minded traders, combined with digital tools such as Webull and Robin Hood, allows the average person to enter trades efficiently and quickly.
Webull, Robinhood, and other stock trading apps played a pivotal role in the rise of meme stocks. These digital platforms developed trading tools retail traders used for trade executions, leaving traditional brokerages by the wayside. The digital rise in self-functioning brokerage was newly created at the start of the meme stock craze and became a powerful tool for retail traders - empowering them to make clever money moves in the market.
Short Squeeze ≠ Fundamentals:
As I have discovered, most contempt for meme stocks is buyer's regret, plain and simple. Nothing possibly could conjure more condescension and denigration than a massive price movement that someone wasn’t a part of. Furthermore, it's energy that’s been distracted - used in a method that isn’t similar to the accuser’s investment philosophy and, in their eyes, a waste of time and capital.
Yet, condescension follows meme stocks far more frequently than most other securities. The idea is that retail traders of meme stocks are in it for the fundamentals; contrary to popular belief, the majority are not diligently looking at the financial statements.
Many investing accounts, mutual funds, and pension plans use a buy-and-hold strategy. The masses use indexing to keep things simple, as they should, but not all methods are one-dimensional.
Analysis of meme stocks doesn’t involve fundamentals; that’s not why spectators invest in them. The meme stock craze is centered on a unique strategy called the short squeeze. This play occurs when shorted stockholders are forced to cover their positions when the price of an asset rises sharply. It's a phenomenon that occurs when a particular security has a significant amount of short interest, meaning there is tremendous pressure for a stock on the short-selling side in an attempt to push the stock to decline in value. Contrarian investors identify the risky short-interest play by the amount of volume on the downside relative to average daily volume. This calculation gives a ratio used as a barometer for determining a short-interest play.
The short-selling movement uses tactical means, including large volume, much like retail traders who buy into shortened securities simultaneously on the buy side. However, tactics like these are not the first in investing history.
The biggest short squeeze on records was during 2008, when Porsche Automobile Holdings SE, a majority investor in Volkswagen AG, increased its stake in Volkswagen by nearly 75%. Subsequently, all available stock was bought up from the state of Saxony, leaving sellers no room for additional shares to sell. This action meant that not all short sellers could cover their positions, leading to a sharp increase in price action, and Volkswagen’s shares went to an all-time high in the company’s history.
Currently, other meme stocks are poised to act in a similar fate. Game Stop (GME), during the initial short squeeze saga in 2021, had a short interest of 140%, as measured by the short interest percentage of the float. From an industry perspective, above 20% is considered to be high. In addition, American Multi-Cinema (AMC) had a short interest % of float of about 20% in May 2024.
True Value:
As investment media continues to cover the meme stock movement, it must be noted that fundamentals are irrelevant in their analysis. While contributing variables could lead to more buyers, spectators are isolating short-interest movements more than financials.
As the markets continue to segway through social changes, value always exists within them. The arduous part is isolating arbitrage opportunities. While meme stocks continue to be the center of Wall Street antagonism, it should be cautioned that these stocks solely represent an opportunity, albeit a risky one.