These two stocks caught fire in early 2021 as so-called memes — companies with rabid followings among individual investors — took off. Much of their success could be attributed to traders who were fans of the brands, maybe even more than the stock fundamentals.
So what does the big pullback in meme stocks say about the broader market? And has sanity returned to investing, or will the meme stocks make a comeback?
Some experts argue that the rise of meme stocks is a good thing, if for no other reason than it helps to democratize the market. More Millennials and Gen Z members have started to realize that investing can be a way to build long-term wealth.
That said, many of these younger investors have more of a short-term trading mentality, particularly regarding stocks like GameStop and AMC and cryptocurrencies such as bitcoin.
“Last year’s meme stock craze brought a surge of new, younger investors to the stock market,” said Keith Chan, president of Moomoo, a trading app.
“This is not a passing fad,” he added. “Investors are not done with meme stocks just yet. However, the speculative and volatile nature of this asset class underlines the critical need for a cautious approach when it comes to trading meme stocks.”
Chan said that about half of the customers the app surveyed in a recent report indicated that meme stocks were “the biggest bubble,” even more than cryptos and housing.
Earnings matter more than fads
“Investing in meme stocks carries reckless and unnecessary risk, which puts an investor’s portfolio in danger of potentially devastating declines,” said David Trainer, CEO of New Constructs, an investment research firm, in a report.
“We don’t see a problem with paying a premium for a company producing strong profits, but none of the meme stocks are producing strong profits,” Trainer said, adding that valuations of the most popular meme stocks, especially GameStop and AMC, “remain untethered from reality.”
The ginormous sell-offs in meme stocks at the start of 2022 may be a sign that investors recognize how bubblicious last year’s rally was. That said, younger traders may now just be flocking instead to new themes (over memes).
So how likely is it that younger investors listen to the wisdom of some of their elders and put money in diversified funds that own a basket of stocks instead of going all in on meme stocks?
“The public remains more active in the market than they were prior to the pandemic,” said analysts at S&P Global Market Intelligence in a report Tuesday. “We expect this overall heightened level of retail engagement to persist, though sudden rallies in single stock names now seem less likely.”