Some experts think the meme stock craze seen during the pandemic is a thing of the past but retail investors still have an appetite for them, boosting their performance.
Gamestop’s stock, GME, has increased 29.44% year-to-date, surpassing the 20.28% gains the S&P 500’s has seen in the same time period. But analysts say these equities are bad bets that investors should avoid.
Despite the warnings of career investors and market analysts, retail traders are still chasing meme stocks years after they became a popular trade during the Covid pandemic. Their price fluctuations are typically volatile, short-lived highs and long-lived lows that can be triggered by social media; the rise in GME’s stock price during the pandemic and earlier this year is connected to the social media account Roaring Kitty and its founder, the hobbyist-turned-financial-marketer Keith Gill.
“The jumps back in May were triggered by Roaring Kitty,” said Vuk Vukovic, the chief investment officer of Oraclum Capital, a hedge fund in New York. “Investors got reminiscent of 2021 and wanted a piece of the action, but the entire thing looked more like a pump & dump.”
Chart of GME price fluctuation from January 2024 to September 2024.
Wall Street’s negative forecasts hasn’t dissuaded retail investors from buying GME and other meme stocks such as AMC and Tesla. GME is among the top 10 traded equities in the Robinhood index HOOD, which tracks the top 100 most-owned assets on the platform, as of July 2024. All of the magnificent seven, except Alphabet (Google), hold a spot in the top ten. GME and AMC Entertainment Holdings (AMC) are the seventh and eighth investments on the list and both outrank traditional stocks Disney and magnificent seven member Meta in the index.
Retail investors are “playing a dangerous game” against Wall Street insiders who will likely win while they take on big losses purchasing GME and other meme stocks, the Chief executive officer of investment research firm New Constructs, David Trainer, said.
“These stocks are not investment vehicles, they are speculation vehicles,” Trainer continued. Adding that sophisticated investors don’t take Gill seriously. “Roaring Kitty is more about making money for himself than anyone else.”
Gill’s posts about his own holdings in GME on social media platforms Twitter/X and Reddit attracted a flock of retail investors who began looking to him for guidance and unwittingly cemented the influence he would have on the stock’s volatile performance. However, most of his followers ended up losing money as the meme craze continued.
The House Financial Service Committee that governs the Securities Exchange Commission began an investigation into Gill in January 2021, alleging that he used his influence to manipulate GME’s price for his own benefit. Gill maintained his innocence and asserted that he never solicited anyone to trade shares.
The market continued to witness Gill’s grip on these equities until he unexpectedly stopped updating his social media account in April 2021, and again when GME’s prices surged earlier this year following his return from a three-year hiatus despite on-going legal troubles.
Some investors are finding other ways to play the volatility in GME without trading shares. Jeremy Thompson says he lost close to $15,000 this past summer expecting the stock to rise similarly to it did in May and June. Now, rather than buy GME stock, Thompson is buying options that will become valuable if the stock rises.
“My strategy is to keep doubling down; waiting for MOASS ( mother of all short squeezes ),” Thompson said.
Others are holding onto shares they have in the hopes that beaten-down stocks like AMC will recover. The stock hit a record-high price of $393 in April 2021 but has been declining every year since. In spite of annual growth in revenue – which is in part a result of consumer’s return to spending on in-person experiences post-pandemic– AMC’s stock price has dropped 28.59% year-to-date.
Alexander Proctor of New York claimed post-tax earnings of approximately $6,000 with GME in March 2021. He didn’t have that same luck with AMC even though he held stock at that time.
“I won’t make any money,” Proctor, 28, said in regards to selling his shares. Adding that he would lose his investment and that is the main reason why he holds his AMC stock. The second reason is for the discounts on movie tickets he receives as a shareholder.
Other than a social media frenzy, what’s required for GME’s price to rise is improvement in the company’s performance. Although the company’s stock is up year-over-year, this is GameStop’s fourth consecutive quarter reporting revenue loss, which is increasing uncertainty around the company’s future.
GameStop (GME) quarterly earnings, released Sept.10, showed a 4 cent per share earning which surpassed analysts’ prediction of a 9 cent per share loss. However, the overall report was seen as disappointing and sent the stock’s price tumbling as investors set eyes on year-over-year revenue loss north of $1.1 billion and a reported revenue of $798.3 million that fell below analysts’ forecast by more than $97 million.
A turnaround will require the video game retailer to change its business model and close physical stores to cut operating costs like rent.
“This turnaround, if successful, will take a long time,” said Jeremy McLean, retail team managing director at Hedgeye Risk Management. The company knows that as well, he adds, noting that in 20223 GamStop CEO Ryan Cohen described the “mountain he sees in front of him that will be a tough climb.”