It seems the meme stock phenomenon is enjoying a resurgence. The recent surge in trading activity focused on particular individual stocks is delivering significant gains, prompting speculation that we’re witnessing a sequel to the meme stock era.
Shares of social media platform Reddit, home to the infamous Wallstreetbets forum, saw a staggering 120% jump after its IPO last week. The irony is undeniable – Wallstreetbets itself served as the launchpad for the original meme stock craze, so it follows that its own shares demonstrate similar tendencies upon listing.
Meanwhile, Donald Trump’s Truth Media stock exploded with a one-day climb of 59% following its public debut via a SPAC. Such volatile trading behavior indicates the return of meme stocks – and with considerable force.
Notably, these aren’t isolated cases. GameStop, arguably the original meme stock, along with the highly speculative assets of bitcoin and MicroStrategy, have all experienced dramatic price appreciation recently and without much in the way of supporting fundamental news.
One of our analysts highlights that these gains reflect a broader market climate driven strongly by momentum. This unbridled enthusiasm now permeates various corners of the market, resulting in a rush towards highly speculative investments. Momentum as a market force can prove surprisingly enduring, sometimes defying the expectations of experts.
Three Clues to Spot the Next Meme Stock
With meme stocks gathering force, investors are eager to identify potential candidates. Here are three primary characteristics our analysts have observed, common among those stocks primed for rapid, hype-driven liftoff:
1. Near-Fanatical Support:
A defining characteristic of the initial meme-stock surge was a fervent ‘us versus them’ mindset, often fueled by social media. Pockets of such fanaticism persist in the cryptocurrency space. It’s also quite noticeable with Truth Media, aligning tightly with the political passions surrounding former President Donald Trump.
One of our analysts suggests that the most ardent Truth Media investors likely see the stock as an option on the success of the MAGA movement itself. This translates directly into investment decisions driven by loyalty and belief, rather than balance sheets, potentially making these buyers very resilient to price fluctuations.
2. Fundamentals? What Fundamentals?
When unwavering conviction forms the foundation of investing, it’s no surprise that traditional valuation methods get tossed aside. Investors driven by ardent belief in a company, concept, or personality have little need for assessing profitability. In fact, such metrics can appear as unnecessary hurdles.
Analysts point out that detached, rational investing simply isn’t part of the picture. Detailed analyses of discounted future cash flows won’t be a decision-making factor for these traders. This is illustrated by Truth Media’s eye-popping multi-billion-dollar valuation. Keep in mind that this valuation was achieved on the back of just $5 million in revenue over the first nine months of 2023.
Similarly, though GameStop has fallen from its peak, its valuation remains disconnected from traditional standards. These stocks’ lofty prices aren’t supported by value-focused metrics, nor do they promise demonstrable future growth. As such, the unique ‘meme stock’ label continues to apply.
3. The Power of the Short Squeeze
Skyrocketing valuations unmoored from underlying fundamentals create a magnet for short-sellers. These are investors wagering that the company will fail, borrowing shares to sell now with the goal of buying them back cheaper at a later date. But, as witnessed in 2021, this can be a dangerous game to play when meme stocks are involved.
If enough investors catch ‘meme fever’ and start aggressively buying, those short-sellers may find themselves in a desperate battle to cover their positions. This results in a frenzied, upward-spiraling cycle known as a ‘short squeeze’, capable of catapulting share prices to astronomical heights.