MEME Stocks – The Perpetual Favorite

Jul 9 18:23

Key takeaways

A MEME stock is a company's shares that go viral online and see a drastic price increase driven by short-term traders
A MEME stock tends to follow a pattern containing five phases
ETFs such as MEME and BUZZ track MEME stocks

The craze for MEME(pronounced /miːm/) stocks has gradually spread among investors worldwide since late 2020.

Generally, a MEME stock is a company's shares that individual investors widely follow on social media platforms such as Reddit and quickly gain hype.

In other words, a MEME stock is a stock that has gone viral on the internet and triggers mass buying.

Therefore, many traditional investors and professional analysts believe that surfing the buying wave is extremely risky and unsustainable as the high stock prices are heavily driven by investor sentiment.

Hence, they define participation in all MEME stock trading as high-risk speculation.

For some investors, investing in MEME stocks may be rewarding, while some investors may lose money.

What is a MEME stock?

Originally known as an Internet meme, MEME was first coined by biologist Richard Dawkins to represent "an idea, behavior, style, or usage that spreads from person to person within a culture."

In recent years, with the development of social media, many people post interesting videos, pictures, texts, and so forth on forums and circulate them widely. Some went viral because they are interesting and could be used in subsequent re-creations.

MEME stocks, like MEME, refer to stocks that explode in popularity on online social platforms such as Twitter, Facebook, and Reddit.

MEME stock prices tend to spike in a short time (usually hours or days) due to the sudden surge in interest and discussion on online social platforms and the subsequent buying frenzy by a large number of individual investors. However, these short-term spikes can often be followed by equally rapid trend reversals, making MEME stocks far more volatile than the average stock market fluctuations.

Who started the MEME stock movement?

It is widely believed that the MEME stock boom unofficially kickstarted in the summer of 2020 and then culminated in 2021.

At that time, most people were stuck at home due to the pandemic. They looked for things to do and ways to turn their free time or spare money into more money. Therefore, many people turned to the stock market and social media for ideas.

Video game retailer GameStop (GME) was widely recognized as the first MEME stock.

An investor named RoaringKitty (real name Keith Gill) began sharing his thoughts on GameStop stock on Twitter, YouTube, and the reddit/r/wallstreetbets forum in 2019.

Founded in 1996, Gamestop is a multinational video game retailer with over 5,000 brick-and-mortar retail stores. As more people have started buying games online in recent years, and the pandemic has exacerbated the difficulties of operating offline stores, its retail model was criticized as outdated, and its stock price dropped to around $3 in 2019.

Thus, more and more short-sellers targeted the company. According to Reuters, GME had around 140% short interest in January 2021, meaning over 40% of their public float was sold short.

By this time, RoaringKitty had constantly been informing other users on social media about a possible reversal of the undervalued GameStop business, and his posts were increasingly being followed by individual investors.

On January 11, 2021, some investors bet that the appointment of Cohen, the founder of online pet food vendor Chewy, to Gamestop's board could lead GameStop out of the woods and drive the stock price skyward.

But that didn't sit well with short-sellers. From January 19 to 22, short-seller Citron Research continued to make bearish calls on GameStop, saying the stock was only worth half its then-prevailing price.

This move, in turn, prompted some individual investors. Connected by the Reddit community WallStreetBets, they banded together to send the stock higher.

The high point came on January 26. Tesla CEO Musk tweeted a strong endorsement of GameStop, which further inspired individual investors to chase the rally. The stock surged again, causing some short-sellers to close their positions after suffering mounting losses.

On January 29, Citron Research said it would no longer publish short-selling reports. After that, GameStop's stock price tumbled to around $40 at the end of February, ending the first wave of the GME frenzy.

Life cycle of a MEME stock

A Reddit forum user summarized the general pattern of a MEME stock cycle:

Early adopter phase: A company is identified to be undervalued by a large handful of investors, who start to buy the company's shares at the current price level. Stock price remains stable or increases slightly at this phase.
Middle phase: The first wave of rapid stock price rises begins with sharp daily volume increases. More investors who are watching are attracted to buy.
Late/FOMO phase: The stock goes viral on social media and platforms. Many individual investors come in herds to buy it, fearing that they might miss the opportunity. FOMO (Fear of missing out) sentiment dominates, pushing the stock price higher.
Profit-taking phase: As stock price peaks, the earliest batch of buyers who have made several times the profit gradually cash in their gains. Investors joined in the middle phase become aware that the "smart money-makers" are cashing out or about to cash out. They follow, causing chain selling where everyone fears losing money.
Set for the next cycle: Panic selling triggers a sharp decline in the stock price. Instead of dropping to the bottom, there could be small rebounds if the drop is too drastic. The stock price moves sideways to find a new equilibrium. This phase may last several weeks or months until new catalytic factors trigger renewed buying interest. The next cycle begins to form.

Advantages and disadvantages of a MEME stock

A MEME stock may see a skyrocketing price driven by a buying spike, so participating in MEME stock trading has several benefits.

Firstly, there is an opportunity to gain a quick reward but there is also substantial risk. Secondly, investors can grasp prospective investment ideas before other markets follow suit. Thirdly, the enthusiasm for MEME stock trading may last for years without fearing it cooling off. Investors of MEME stocks are mainly the younger generation who have grown up with social media and are just beginning their investment journey.

Like other highly volatile investments such as crypto trading, considerable risks are associated with MEME stock trading. Firstly, the MEME stock hype may not last forever. Individual investors' time on social media will inevitably diminish once the pandemic subsides. Secondly, short-term stock prices are driven by supply and demand, so price movements are unpredictable and can result in considerable losses over short time periods. Thirdly, some MEME stock prices rose far beyond the fundamentals and may suddenly crash back to earth. Individual investors may therefore turn away from such companies.

MEME stocks to watch

Following GameStop (GME), individual stocks such as AMC Entertainment (AMC), Express Inc (EXPR), and BlackBerry (BB), were riding the MEME stock wave.

In May 2021, after the crypto market crash, some risk-averse individual investors returned to the US stock market, targeting MEME stocks popular on Reddit.

"There's still a huge appetite for this type of trading," said Chris O'Keefe, managing director at Logan Capital Management. "There's still a lot of energy to continue to speculate on the stock market."

Now let's look at what MEME stocks are currently available.

According to data from SwaggyStocks, the following are the main MEME stocks on the forum as of May 16, 2022.

Data: as of May 16, 2022

When deciding on the MEME stocks to buy, the strategy is still "never put all your eggs in one basket."

If investors are not interested in building and managing their portfolio of MEME stocks but still want to know about this category of investment, then ETFs like MEME or BUZZ could be good choices.

The performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost. Returns less than one year are not annualized. For the most recent month-end performance, please call (855) 561-5728 or visit www.roundhillinvestments.com

According to Roundhill's website, the Roundhill MEME ETF (MEME) is designed to closely track the performance of MEME stocks. MEME will include 25 equal-weighted US-listed stocks with high social media mentions and high short interest.

ETF holdings and allocations are subject to change at any time and should not be interpreted as an offer of these securities.

MEME will rebalance every two weeks to cover trending stocks. Because stocks are highly shorted and subject to increased retail sentiment, and the fund's high turnover rate given bi-weekly rebalances, MEME may experience significantly higher price volatility than conventional equity ETFs or mutual funds.

VanEck Social Sentiment ETF (BUZZ) is an actively managed portfolio of 75 stocks with the most social media mentions, including AMD, Tesla, and Twitter.