May 22nd, 2024

Meme stocks are roaring again. This time may be different

By Stan Choe, The Associated Press on May 14, 2024.

NEW YORK (AP) – Meme stocks are shaking Wall Street once again. That shouldn’t be much of a surprise.

Ever since bands of smaller-pocketed and novice investors began taking stock prices of downtrodden companies to breathtaking heights three years ago, the potential for more flareups has been obvious.

Some things are different this time. The biggest change from the initial supernova for GameStop’s stock is how the experience of 2021 makes this all feel familiar. That familiarity, plus some changes in the market, should allow Wall Street to more easily digest the movements without danger to the overall system, experts say.

GameStop in 2021 put securities markets’ capacity and resilience to a test that “few could have anticipated,” the staff of the U.S. Securities and Exchange Commission said in a report later that year.

But some things remain firmly the same. Chief among them is the risk of losing everything that accompanies the potential to make fast money playing such volatile stocks. Here’s a look at what’s going on:

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WHAT’S HAPPENING?

GameStop, the granddaddy of meme stocks, has soared suddenly and sharply. It was nearly 37% higher Tuesday afternoon after surging 74% the day before. Other meme stocks from the pandemic era are moving just as radically. AMC Entertainment, the movie theater operator, jumped nearly 31% Tuesday.

SHOULD THEY BE RISING THAT FAST?

Financial analysts and professional investors who care mostly about numbers like profits, cash flow and interest rates would say no. GameStop’s financial prospects did not change over the weekend, before the dizzying ascent of its stock price. The video-game retailer did post a small profit in its most recent fiscal year following five years of big losses and substantial cost and job cuts.

THEN WHAT TRIGGERED IT?

A burst of momentum brought on by buyers. Conventional wisdom says a stock should eventually settle at a price that reflects how much cash the company is generating, where interest rates are heading and other factors. But in the short term, what sets a stock’s price is how much investors are willing to pay for it. And, for the moment at least, people are willing to pay much higher prices for shares of GameStop.

YOU WERE SUPPOSED TO SAY ROARING KITTY THERE, NO?

Yes, the spark that got the momentum rolling may have been a person who goes by the nickname Roaring Kitty. He was a central character in the initial surge for GameStop, famous for wearing a red bandana and talking bluntly. He rallied other buyers as he professed on Youtube, Reddit’s WallStreetBets forum and even in testimony before Congress how much he liked the stock. GameStop’s stock price shot up more than 1,700% through the first few weeks of January 2021,

WHAT DID ROARING KITTY DO THIS TIME?

After laying dormant since June 18, 2021, the X account for TheRoaringKitty posted a meme Sunday evening. The picture shows a person playing a video game going from a lounging position to upright and alert. Many users on social media took it as a signal, and forums were soon buzzing with people saying they were buying GameStop. That quickly gave way to screenshots that people said showed how much profit they were making by trading GameStop.

HOW CAN THE REACTION HAVE BEEN SO QUICK?

This is the new age of investing, one where anyone can buy a stock with zero commissions simply by tapping a few times on a phone. It’s the culmination of years of innovation. At each step of the way, consumer advocates hailed the broadening playing field, which allowed more people to invest in stocks and build wealth. But they also warned that easy access could encourage people to trade too quickly or too rashly.

HOW MUCH REACTION HAS THERE BEEN, REALLY? IT’S ALL AN EXAGERRATION?

It’s been manic. GameStop’s share price was swinging so sharply after the opening bell Monday that trading in the stock was halted nine times in just over an hour. On Tuesday, the movements for AMC Entertainment were even wilder, and its trading was halted 18 times by early afternoon.

HOW DOES THAT COMPARE WITH 2021?

It’s not as big. On Monday, investors pumped a net $15.8 million into GameStop, along with $37.5 million into AMC, according to data from Vanda Research. That compares with $87.5 million and $170 million, respectively, in 2021.

“Do we think more retail traders can jump in on the trend in the coming days? Yes,” according to Marco Iachini, senior vice president at Vanda Research. “Do we think this is a repeat of 2021? No, and the chances we reach that stage are low.”

Big hedge funds and other professional investing firms are better equipped to handle the situation this time around, he said, and they could be riding the wave higher with small-time investors before trying to exit the trades before them, which could leave those smaller-pocketed investors holding the risk.

WHAT ELSE IS DIFFERENT?

Meme-stock companies have more shares trading in the market than they did in 2021, which could lessen the chances of what’s called a “short squeeze,” according to Nick Battista, director of market intelligence at tastylive, a streaming network geared toward options traders.

A short squeeze is a relatively rare event that can yield eye-popping profits for people riding the wave. When investors bet a stock’s price will go down in the future, they “short” it by borrowing shares and selling them. Later, if the price does indeed fall, the short sellers can buy the stock, return the borrowed shares and pocket the difference.

But when a highly shorted stock rises in price quickly, short sellers could scramble to get out of their trades. They can do that only by buying shares of the stock, which can set off a self-feeding cycle that makes the price shoot even higher.

Such a short squeeze likely contributed to GameStop’s thrilling ascent in 2021, but the SEC”s staff said it was a small fraction of the overall purchases and that GameStop’s stock stayed high even after short sellers had gotten out of their trades.

GameStop in March had roughly 305.9 million shares of its stock trading in the market, more than four times the number of shares it had in March 2021. Such growth “greatly increases the amount of activity needed to squeeze higher” for GameStop and other meme stocks, Battista said. “Can they move higher? Sure, but it’s going to be a tougher task this time around.”

WHAT ARE THE RISKS OF JOINING IN?

It’s important to know the momentum can shift just as suddenly the other way. It took just four weeks in 2021 for GameStop’s stock to go from less than $5 to more than $120. But it has yet to touch that price again. Even after its big jump in recent days, GameStop shares can still be bought for around $42.

Or, just look at Tuesday’s trading. GameStop quickly more than doubled in the morning, topping $64, before paring much of the gains in afternoon trading and regressing to $41.67.

After briefly reaching $390 during the summer of 2021, AMC’s stock was drifting below $3 last week. It’s now close to $7.

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