MEME Stocks are Here to Stay!

If you had any involvement in the stock market in the last week, we are sure you saw the (momentary) re-emergence of the "meme stock" phenomenon.

For those unfamiliar with it, back in the craziest part of the post-COVID BULL MARKET, several stocks saw gargantuan rallies.

What these stocks seemed to have in common was that they had very high short interest as a percentage of the available shares.

What exactly that means and why it is important will be the subject of an entire note tomorrow, but from a high level, many people were betting against these businesses.

Those bets made a lot of sense. The two most famous "meme stocks" were (and are) the video game retailer Gamestop Corporation (NYSE: GME) and movie theater operator AMC Entertainment Holdings, Inc. (NYSE: AMC).

Both businesses have many challenges.

Physical retailers face online competition, and video games can be downloaded and played online. While GME operates stores that focus as much on toys and collectibles as video games, it is not hard to understand why the business doesn't have a great outlook.

Movie theaters got hit hard during COVID-19 and are having difficulty recovering. Going to the theater is still a unique experience, but so much content is available online, and folks can build incredible home theater systems to watch it. The business isn't going away, but movie theater attendance has likely seen its peaks.

AMC also has a ton of debt (almost $5 billion), which puts additional pressure on the company.

This was true in 2021 when the stocks were near their lows. Despite the troubled outlook, though, look at what happened to the stocks back then…

In January 2021, GME went nuts and shot up from less than $5 per share to a peak of $86 by mid-February. This was on NO news. 

It was a couple of months later for AMC, but in May of 2021, it went from less than $60 per share to a high of $387. 

There are many reasons this happened, and we have written several notes about it in the past. Eventually, though, the poor fundamentals and the stock prices better reflected their economic reality. 

Here are the charts through mid-April…

GME had fallen to just above $10 per share and AMC to below $3 per share. 

Then, on Sunday, May 12 – the most famous "guru" of the "meme stock" phenomena named "Roaring Kitty" posted this on X/Twitter… 

It is the picture of a man (perhaps with a game controller in his hands) leaning forward as if he is getting more involved with whatever is in front of him. Something you would if you would get more engaged with a video game you are playing… 

Roaring Kitty hadn't posted in almost two years, so this was unusual.   What was much MORE unusual happened the following day on Monday, May 13. 

Here are the year-to-date charts of both stocks… 

Both stocks went wild! 

GME went from its Friday, May 10 close of $17.46 to a high of almost $50 by Tuesday, May 14. AMC went from $2.91 to a high of $6.86 on that same Tuesday. 

All of this is from just a single social post. One that did not even make any reference to either stock. 

You can see this on the charts above, but by the end of the week, both stocks had given back much of their gains. 

With its considerable debt load, AMC took advantage of the strength to sell/exchange stock for debt and gain more flexibility. This new stock in the market pushed the shares lower. 

GME did something similar by announcing they would sell up to 45 million shares of stock. They also pre-announced disappointing results. Both pieces of news drove the stock lower. 

This is also fascinating stuff, but what we think is most interesting is that it is happening AGAIN. 

When it happened in 2021, most analysts looked at the situation and blamed the massive amounts of monetary liquidity the government had pumped into the system. 

To avoid a collapse during COVID, the government outright sent folks cash, and the Federal Reserve cut interest rates to 0%. They also injected much more money across the board. 

This was called "ZIRP" or "Zero Interest Rate Policy" and was the driver behind the craziness and the inflation that followed. 

Yet here we are, three years later, and we see the re-emergence of similar price moves. 

Now, we certainly are NOT in a ZIRP environment. Interest rates have increased precipitously, and – while there has been much fiscal stimulus – no objective observer could look at the markets and say they are being driven by excess liquidity. 

Maybe not much liquidity is coming out, but it also is not coming in… 

So, how did this happen again? 

We can answer in one word – the INTERNET! 

There have been two fundamental changes in the nature of trading in the stock market over the last twenty years. 

The first is transaction costs.   

They have effectively gone to almost zero for various reasons, and trades can be fired off in seconds or less! 

Four decades ago, you had to call a broker, put in an order, pay a $25 (or $50 commission), and then wait 20 minutes to find out the result. 

Now you can buy stock quicker than you can buy DoorDash – and cheaper! 

The other factor is our ability to communicate with each other. 

Again, forty years ago, there was no way for investors to communicate with each other. Some newspapers came out daily, and we were in the early days of business-focused TV. 

Starting in the 1990s, we began to see the rollout of internet chat boards that allowed investors – who otherwise did not know each other–to start communicating. 

Today? 

We have grown that ability to be a community one thousand-fold. Through social media, mobile phones, ubiquitous high-speed internet connectivity, and various other internet outlets – thousands (or even millions) of investors can quickly group together for a common cause. 

Believe it or not, this used to happen on the old in-person New York Stock Exchange, where you would see groups of investors gang up to impact a stock. 

Now we are seeing that magnified times a million! 

Is this a bad thing? Honestly, we don't have an opinion but it is REALITY. 

We think those who blamed low interest rates for the craziness of the 2021 BULL MARKET misunderstood the changes that were taking place. The 2021 "crazy" is here to stay! 

Do you think the return of the “meme stocks” is a good or bad thing for the stock market? Send us your thoughts via email at [email protected] or in the comments section on our website.