Meme stocks are like 'playing the lottery': Investor

The meme stock rally is fizzling out as shares of both GameStop (GME) and AMC Entertainment (AMC) are falling after two days of massive gains. Financial Analyst and YouTuber Kevin Paffrath joins Market Domination to discuss the meme stock craze following the online return of “Roaring Kitty.”

“It feels like we’re back at the beginning of 2021,” Paffrath says of the meme sock action. He adds that he sees meme stocks more as “momentum stocks,” as it ultimately boils down to volume. When getting into momentum stocks, Paffrath says that investors should go in prepared to lose 100% of their money as these stocks move quickly.

He notes that the rally in 2021 was fueled by the stock market “going straight up” for nine months. He also points to people using their stimulus checks toward momentum stocks, which allowed companies like GameStop to take off. However, as inflation remains sticky, wallets are tighter and fewer people are willing to invest in momentum stocks this time around.

“It’s sort of like playing the lottery,” Paffrath says. “People don’t generally care about the mechanics behind it. They just want to make money, and I don’t blame that because times are tough,” he adds.

He also highlights how these rallies are great for the companies, analyzing how AMC “basically got three months of free operating expenses to pay for their employees and their theaters" from this week’s gains.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video transcript

The meme Stock rally already showing signs of fizzling out here.

Shares of both gamestop and A MC coming under pressure after two days of big gains and joining us now is Kevin Path Rath Financial analyst and youtuber behind me, Kevin.

Uh Kevin always good to have you on the show.

Let's just start right there.

You know, K we were talking a lot of course, this week as a lot of people were the Meme Stocks games, stop A MC Blackberry kind of fizzling out today.

But start there, Kevin.

What, what did you make of the, the moves we saw there?

Yeah, absolutely.

First of all, it's incredible.

It feels like we're back at the beginning of 2021 and I'm just waiting for Vlad from Robin Hood to start coming out and making announcements again.

It's wild.

Uh So it's quite entertaining.

But uh one of the things to know is even back in 2021 we had these down days, we're really only on the third day of this momentum rally again.

I like to replace the word meme Stock with momentum stock.

That's really what this is the more momentum you get the more they go up, uh, it's not really a fundamental move.

Right.

It's all in volume and how many people are into it.

Now, these off days can, oftentimes lead to violent new rallies.

So we'll see usually what people are doing and I just pulled mine up is they're just making a list of the highest short interest and then they're going down that and buying it.

That seems to be the only fundamentals that are going into this and it's really entertaining to watch.

Um, are you participating in it?

I participated in the, uh, there was a, this company, Faraday, Faraday Futures.

And so yesterday I was looking at it going, this is like a tiny little company and it was up 300%.

And usually what happens is the news coverage hits after the market closes and then it goes up even more the next day.

And so today it's up another 150%.

I don't think I'm gonna play again for tomorrow, but I, I, when I have small little trades on the side that I want to have some entertainment with when it comes to the momentum stocks, that's what I do.

But I go in knowing that if I'm going to lose 100% of my money on those, that's ok.

In fact, we started this thing in the office where instead of betting each other 20 bucks, we make the other person buy a meme stock option.

So that if it really rallies, it really upsets the person who lost the bet.

More amazing.

And by the way, Faraday future happens to be the second highest trending ticker on Yahoo Finance.

So obviously you are not alone in noticing that one and, and that it does continue rally and there's a whole crop of other sort of memeish names that still seem to be going up today, even though, you know, gamestop and A MC are down.

Um When you talk about the sustainability of this, I mean, one other big difference between now and 2021 as we have talked about on the program is that the volume in these names is much lower.

You, you know, when you talked about how volume has to be there for it to keep going there, it's definitely higher than it was, you know, a week ago or two weeks ago, but it's much, much lower than it was in 2021.

So, what does that tell us about whether this can keep going?

Yeah, that's definitely going to put some upside limit on where we can go.

What we have to think about for January of 2021 is we came off basically nine months of the stock market going straight up.

Uh And that was, you know, Larry Kudlow, we're gonna have a V shaped recovery, Rome Powells running the money printer, they're sending stimulus checks, people are taking their stimulus checks and throwing them into, uh, into the momentum stocks today.

Wallets are tighter.

We haven't seen stimulus in years.

Uh, you're not going to for a while.

Credit card rates are higher.

Grocery prices are higher.

The dollar menu is now $3 at mcdonald's.

It's a lot harder to come around extra cash and less people are playing the stock market than they were.

Uh, after 20 twenty's madness.

That's for sure.

Kevin, I'm just interested too to get your take and, and granted, you know, need to speculate here.

But I'm, I'm just curious when, when you think about why people were kind of moving into these names.

Gamestop A MC Blackberry.

What do you think Kevin was sort of, um, kind of motivating them?

Do, do you think it was, listen, it just, maybe it's just fun.

It's entertainment.

You get to play along with Dave Portnoy or, or is it, you know, is it greed?

Is it, is it anger, you know, Wall Street and the hedge, maybe, maybe it's all three Kevin.

Yeah, I mean, to some extent it's all of those, the biggest motivation is to make money.

Right.

Everybody wants to go in and buy a 10 cent zero day option or, you know, a weekly call option and have it turn into five bucks and the one time that happens out of 20 trades just kind of keeps everybody coming back because there, it's sort of like playing the lottery.

Uh, it's really fun.

Uh, of course, the argument that, hey, it's to get the shorts or hey, why are they halting the stock?

I did a whole video breaking down, why they halt the stocks, the limit up, limit down.

And that people don't generally care about the mechanics behind it.

They just want to make money and I don't blame that because times are tough and I'm all for it.

So, hey, if, if folks can make money on, on the momentum, great, just know once it really consistently bleeds, it does bleed.

Good news is the companies like A MC.

Uh, they're starting to issue shares a couple days ago.

A MC raised $250 million that covers a quarter of their negative cash flow.

So they basically got three months of free operating expenses to pay for their employees and their theaters.

It's actually really good for the companies and a good opportunity for them to stabilize their balance sheets or at least to buy themselves a little more time.

Um, in the case of some of these guys, right, Kevin.