Trading Desk: Meme Stocks Back; Never Really Left

Meme stocks, those internet-driven darlings that captured the imagination of retail investors in 2021, are once again making headlines. Familiar names like GameStop (GME) and AMC Entertainment (AMC) are experiencing wild swings, signaling a renewed taste for risk in the market.

But there’s a key difference this time around. Unlike the social media-fueled frenzy of the past, much of the recent volatility seems to be driven by actual company news and fundamentals – a refreshing change from the meme-based trading of yesteryear.

Focus on Fundamentals

While the term “meme stock” often implies a social media-driven investment approach focused on hype, the reality is more complex.  A focus on underlying business fundamentals is becoming increasingly important for investors, even within the meme stock category. To highlight this shift, let’s revisit Yahoo! Finance’s “Magnificent Seven” list of meme stocks:

GameStop (GME): The original meme stock, GameStop’s surge was undeniably fueled by online communities. However, recent changes in management and a shift towards e-commerce show a focus on revitalizing the company’s core business.

AMC (AMC): Similar to GameStop, AMC became a symbol of retail investors’ power —- but the company’s also navigating industry shifts and sizable debt, emphasizing the need to look beyond the meme narrative.

Carvana (CVNA): Carvana’s used-car sales model saw initial success, but recent economic headwinds and concerns about their growth and profitability highlight the importance of sound fundamentals.

Beyond Meat (BYND): Beyond Meat disrupted the plant-based food sector, but increasing competition and questions about long-term demand suggest investors focus on the fundamentals.

Kodak (KODK): Kodak’s surge was unusual and short-lived, tied to a potential pharmaceuticals venture that has since fizzled, further emphasizing the importance of lasting business strengths.

Palantir (PLTR): Palantir’s data analytics have real-world applications, yet consistent profitability remains elusive, requiring investors to pay close attention to financial results.

Coinbase (COIN): As the cryptocurrency market grows, Coinbase’s fortunes remain largely dependent on its dynamism. Investors must look at the company’s revenue models and the broader crypto landscape for a more robust analysis.

Key Takeaway: These companies, and others like them, have all experienced periods of intense investor interest fueled by both fundamentals and online hype.  Savvy investors will analyze both, recognizing that lasting success is built on sound business practices, not just social media buzz.

Change in the Wind

Tracking these stocks reveals some fascinating patterns. In the peak of the 2021 GameStop frenzy, clusters of volatility were rampant. However, these signals have a different significance in today’s market.

During the 2022 bear market, sudden meme stock surges often foreshadowed broader market reversals – a warning sign of unsustainable speculation. In contrast, since the October 2023 lows, meme stock volatility seems less predictive of overall market direction. This could indicate a healthy, risk-on bull market where even meme stocks benefit from a rising tide.

Of course, fundamentals still matter. Palantir’s recent stock drop following its earnings report reminds us that even meme stocks can’t escape the consequences of disappointing results. This week, as Robinhood and AMC release their quarterly results, investors will be watching closely to see if this trend of fundamentals-driven meme trading continues.

While meme stocks may never completely shake their reputation for social media-fueled chaos, the current resurgence suggests a potential maturation.  Investors are paying closer attention to underlying business performance, not just internet hype. This shift towards a more sustainable model could mean that while the meme stock phenomenon isn’t going away, its staying power might just be growing stronger.