The "Meme Stock" Update for the Ever-Growing Reddit Buzz

Checking in on the Reddit-fueled meme stock mania

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For over 15 months, investors have enjoyed a historic bounce-back rally in the U.S. stock market. Since the widely followed S&P 500 hit its pandemic low on March 23, 2020, the SPX has surged back by as much as 88%. To put this figure into context, the very long-term average annual total return (including dividends) for the stock market is about 7%.

But for some retail investors, these gains would represent peanuts.

Beginning in January of 2021, retail traders communicating on Reddit and a handful of other social media platforms began piling into stocks that were heavily shorted by institutional investors and/or had very small floats (the amount of tradable shares). By purchasing shares and call options in these stocks, retail investors were able to enact short squeezes, leading to skyrocketing share prices.

This rapid surges in these specific stocks followed by their equally rapid declines are the result of retail speculation. Traders were not buying shares of GameStop Corp. (NYSE:GME) because there was a belief that the company had a hidden path to growth that would not only reverse its fortunes, but also revolutionize the gaming industry.

As in all historical instances of speculative manias, traders bought securities that are on the rise because the price was on the rise, and these traders were counting on their ability to sell those shares at a significantly higher price. That kind of dynamic in the stock market is not sustainable and, thus, the bubble always bursts.

There is more to the meme stock mania than sheer momentum alone, though. The day traders of Reddit’s thread titled r/WallStreetBets believed that GameStop stock was fertile ground because so many professional investors were shorting GME. These traders believed that through force of numbers from the retail crowd, they would be able to squeeze out the short sellers and force GME pricing even higher. That plan actually worked -- but just for a few days.

Though many of these meme stocks -- companies that have been lauded for their popularity on social media, rather than their actual operating performance -- have given back most of their gains from earlier this year, there are three meme stocks that have held strong on profits for retail traders in 2021.

AMC Entertainment Holdings, Inc (AMC): AMC was piled into by Reddit-based traders for essentially the same reasons as GameStop. AMC Entertainment stock had a higher level of short interest and a compelling draw for a short squeeze in late January. AMC Entertainment stock increased by nearly tenfold since becoming a meme stock.

BlackBerry Limited (NYSE:BB): In the first four weeks of January 2021, BlackBerry stock nearly quadrupled, hitting a 10-year high, apparently driven by aggressively bullish retail investors in the aforementioned r/WallStreetBets group on Reddit. BlackBerry stock has more than tripled since becoming a meme stock.

GameStop (GME): GameStop became the most publicized meme stock beginning in January of 2021 when CME shares spiked hundreds of dollars in a matter of days. Users on the subreddit, r/WallStreetBets, began buying GME en masse after traders learned that hedge fund had shorted GameStop stock over 150%.

Nokia Corporation (NYSE:NOK): As Nokia has been playing a major role in 5G deployment globally, NOK became a targeted “meme stock” by Reddit’s r/WallStreetBets due to the fact that prominent hedge funds were heavily shorted Nokia stock, owing to the global industrial slowdown.

Sundial Growers Inc. (NASDQ:SNDL): Sundial Growers stock has more than doubled in value this year, but this is really primarily due to the hype from r/Wallstreetbets, causing SNDL to become a meme stock.

Tilray, Inc. (NASDAQ:TLRY):  Tilray is a business with great foundations in the cannabis industry that is still only at its early stages. Tilray stock on the riskier side of investments, but the potential for high returns can come with this stock. Because of that, r/WallStreetBets locked it onto their meme stock list back in January. TLRY's stock price was hanging out around the $9 per share mark for a number of months prior to shooting up to a peak of $67 in February 2021. This spike was quickly followed by a 50% drop in the stock price which looked an awful lot like a pump and dump.

Here is a quick overview of how meme stocks "work:"

In the first phase of becoming a meme stock, a handful of traders/investors need to believe that a particular stock is undervalued and begin to buy that stock in large quantities. This causes the stock price to slowly begin to increase. Once phase one is completed, the traders/investors who are paying close attention to the market begin to notice the significant increase in trading volume on the stock. This causes more and more individuals to begin buying into the stock, causing the stock price to skyrocket.

By the time we reach the FOMO (fear of missing out) phase, word about the stock has spread like wildfire across social media and online forums. Thus, the fear of missing out takes hold and even more retail investors join in on the ride up. Inevitably, though, after a few days, buying peaks and the early adopters begin to cash out. Similar to the buying phase, the selling phase looks a lot like a chain reaction as fear sets in and the stock price plummets.

Because of this meme stock cycle, it is primarily the early adopters who really turn a profit from these trending meme stocks. Once the meme stock cycle enters into the FOMO phase, it’s likely too late to make a profit despite that being the exact point when retail traders really buy into the trade.

Keep in mind that the meme stocks are not a class of investments that are covered in any textbook. Meme stocks are really just a category of stocks that have seen rapid growth and high levels of chatter on social media channels including Reddit, TikTok, and Twitter. The valuation may not (and often times does not) line up with the price changes or the hype surrounding the given stock.

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