Analysts Advice Caution as Meme Stock Trade Returns
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Meme stocks are back in action after a cryptic tweet from “Roaring Kitty” whose legal name is Keith Gill and is a former Massachusetts Mutual Life Insurance marketer. While the euphoria in meme stocks is reminiscent of 2021 where retail trades managed to trigger short squeezes and epic rallies in several stocks like GameStop and AMC Entertainment, analysts are advising caution after the recent rally.
Leading the charts in the current meme stock rally are the usual names – GameStop, AMC Entertainment, Tilray, and Marathon Digital. Trading was halted in GameStop several times yesterday. During the meme trade of 2020, several companies used the spike in their stock prices to issue new shares which they used to repay their debt.
Meme Stock Trade Is Back
GameStop for instance turned net debt positive while SNDL raised so much cash that it not only repaid its debt but also turned a lender by lending money to other struggling cannabis companies.
Many analysts stopped covering meme stocks as the rally in their stocks couldn’t have been justified on fundamentals.
We are seeing something similar currently and just two days into the meme stock rally AMC issued $250 million worth of shares in an offering yesterday. Ironically, B. Riley Financial which was among the sales agents for AMC’s share offering is among the stocks that are on the meme stock list.
As meme stocks are back in action so is the subreddit WallStreetBets which now has 15 million members. The group was at the forefront in 2021 also and helped trigger short squeezes in many stocks which eventually led to massive losses on hedge funds that were short on these names.
Analysts Advice Caution Amid the Rally
Analysts are meanwhile advising caution and fund manager Cole Smead compared the meme stock mania to gambling. “You’ve got to remember these are young people, these are forty-year-old people like me, who are going out and doing stuff that is just frankly stupid,” said Smead who is the CEO of Smead Capital Management.
He added that trades were “just taking in rat poison” – a reference to the analogy that Charlie Munger made about cryptocurrencies.
Smead is hardly the only expert warning against the rally in these stocks. Boaz Weinstein the founder and chief investment officer of Saba Capital Management termed it “bewildering.”
He added, “We want to make 10%, we want to make 15% – [when] you see something that’s up 100% [but] you don’t know why, it feels great because it’s up, not down for those who have it; but it certainly in some ways, you could say, makes a mockery of the challenge of investing.”
Weinstein who said that the rally cannot be justified and is only speculation, added “Why today, why not a million dollars a share? And so, I look at it and I don’t understand it, and I don’t want any part of it.”
Meme Stocks Indeed Got Ahead of Fundamentals
Amid the meme stock rally of 2021, GameStop rose as high as $120. Traders saw it as a turnaround candidate under the leadership of Chewy’s cofounder Ryan Cohen. To be sure, GameStop took a series of steps like diversifying into other categories and focusing on online sales to revive its fortunes. It also overhauled its leadership team as Cohen hired tech executives to lead the company.
However, the company’s core business continued to sag while many new hires either left or were let go.
The FOMO Factor Could Be Driving the Rally
According to Nigel Green, the CEO of the financial advisory firm deVere Group “W]e expect day traders will pile in not because they think the memes have any real value, but because they hope others will get FOMO (the Fear of Missing Out), jack the price up and then they can sell off and make a quick profit.”
While he said that some trades could end up making big money he warned – “But let’s very clear: This is extremely speculative, and valuations can be expected to be incredibly wild — in both directions.”
Incidentally, a lot of retail trades who bought meme stocks near the peak in 2021 could never recoup their losses as these stocks did not reach those levels again. Experts see a similar playbook play out amid the current euphoria once fundamentals eventually catch up with stock prices.
