Meme Stocks Experience a Resurgence, Caution Advised Amidst Volatility
After a period of relative calm, meme stocks are once again grabbing the attention of investors. According to a report by The Economist, these stocks have outperformed the overall market, with the meme index up nearly 60% this year, outpacing the US S&P 500 by 40 percentage points. While returns on individual holdings have been impressive, it should be noted that many of these stocks started from a low base.
Often considered risky investments, meme stocks refer to companies whose shares have plummeted and attract unsuspecting investors who hope to drive up their prices for quick gains amidst sharp volatility. Some notable examples this year include FinTech company SoF, whose stock has doubled, and software maker Palantir, which has nearly tripled. Car retailer Carvana has seen an 800% rise, while struggling homewares company Tupperware Brands saw its shares jump 290% in the past month. Even defunct retailer Bed Bath & Beyond and bankrupt trucking company Yellow have become targets for meme stock enthusiasts.
However, it’s important for investors to exercise caution and not be drawn into the fear of missing out (FOMO) mentality. The investment world would likely be better off without the unpredictable and often risky nature of meme stocks. The phenomenon of meme stocks first gained attention in January 2021 when online traders on platforms like Robinhood rallied behind struggling video game retailer GameStop, causing its share price to skyrocket by a staggering 1,915%. This trend soon spread to other companies like cinema chain AMC Entertainment Holdings.
While some investors made substantial profits during this initial frenzy, many others suffered significant losses. Those who entered at the peak and held on until the crash found their fortunes dwindling, some losing their entire retirement savings or even falling into debt. Undoubtedly, the rise of meme stocks brought excitement, but it wasn’t a rational form of investing.
Although some analysts dismissed the phenomenon as a short-lived madness of a late bull market, meme stock mania resurfaced during a bear market rally last summer, repeating the same pattern. Despite the volatility and unpredictability of meme stocks, it seems they will continue to emerge periodically, driven by passing social media trends and short-term speculation.
Giles Coghlan, chief market analyst consulting for HYCM, suggests that meme stocks’ resurgence remains uncertain due to their inherent nature. It would be challenging to determine definitively if they are truly back. Meme stocks are heavily influenced by fleeting social media trends, making it difficult to track their activity. Nevertheless, Coghlan concedes that it’s likely meme stocks will continue to resurface every few years in a cyclical manner.
However, instead of considering meme stocks, Coghlan advises investors to focus on purchasing the dips in stocks related to artificial intelligence, such as Apple, Meta, Nvidia, or Amazon. Amidst the slipping US shares and the Federal Reserve’s potential rate increase, it’s essential to approach the market prudently.
Daniela Hathorn, senior market analyst at Capital.com, acknowledges that meme stocks will always attract a subset of retail traders and investors, propelled by FOMO and greed-driven rallies. However, she warns that most meme stocks are struggling consumer discretionary brands with weak fundamentals. They tend to reverse their gains once the initial frenzy subsides. For instance, GameStop and AMC Entertainment Holdings, the original meme stocks, have seen significant declines in their share prices over the past year. Bed Bath & Beyond is also hanging on by a thread, falling 99%.
Capital.com’s Myron Jobson asserts that meme stock investing is akin to gambling rather than a sustainable strategy for long-term wealth. Attempting to time the market rarely leads to success, and the odds are often stacked against investors. Jobson raises concern over younger investors who may be lured into meme stock mania through social media platforms like Instagram and TikTok. While investing carries inherent risks, allowing oneself to be drawn into meme stocks without proper knowledge and strategy could deter individuals from future investment opportunities and hinder long-term financial goals.
In light of this, Jobson recommends beginners to consider actively managed investment funds or low-cost ETFs as a better starting point for building a well-diversified investment portfolio. A diversification strategy helps cushion the occasional market shocks associated with investing in a single asset class or region. As global stock markets have been volatile recently and another crash seems possible, it’s crucial to understand that the stock market is not a quick path to riches. Fads, frenzies, and meme stocks may make a lucky few rich, but for most investors, the outcome is a loss.
