Meme stocks are volatile, risky investments that most investors should approach with extreme caution, if at all. But their success is hard to deny.
The stocks, a loosely defined group that is popular on investing chat groups and embraced mostly by retail investors in search of gigantic gains, emerged as one of the defining trends of 2021 – even as soaring share prices left many observers agog and warning of disaster.
But as the year winds down, it’s hard to spot any widespread problems associated with stocks that have made a mockery of diversified portfolios and remain popular with investors.
Worry not, this isn’t an argument in favour of investing in meme stocks.
Stocks driven by investor enthusiasm, rather than rational valuations, can look nutty. GameStop Corp., the struggling videogame retailer that took off as a meme stock in January, reported a third quarter loss of US$105.4-million, for the three-month period ended Oct. 30. That’s substantially larger than the loss of US$18.8-million in the third quarter of 2020.
As well, stock prices of many popular meme stocks are well off their highs, implying that investors who bought near the peaks and held on could be nursing horrendous losses right now.
That said, meme stocks have at least three things going for them.
First, many have held onto spectacular year-to-date gains. GameStop’s share price soared from US$17 near the start of 2021 to an intraday high of US$483 by Jan. 28, marking a one-month return of more than 2,700 per cent.
Eleven months later, GameStop’s share price sits at about a third of its peak, no doubt justifying all the finger-wagging from seasoned professional investors who value stocks on earnings and sales rather than online chatter.
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However, for all its ups and downs, GameStop is no slouch. The share price is up 739 per cent in 2021, suggesting that the stock, though well off its highs, is by no means a flameout.
Similarly, AMC Entertainment Holdings Inc., the U.S. movie theatre chain that enjoyed a similar level of investor interest this year when its share price rocketed in June, then declined, is still up more than 1,200 per cent since January.
Okay, these are standouts. But a broad basket of meme stocks also shows impressive gains for the year.
The Roundhill Meme ETF, which trades on NYSE Arca under the ticker MEME, is an exchange-traded fund from New York-based Roundhill Investments that tracks 25 U.S.-listed stocks, including Robinhood Markets Inc., Peloton Interactive Inc. and BlackBerry Ltd. It launched earlier this month, so there is no year-to-date track record. However, the performance of the fund’s constituents (excluding those with recent initial public offerings) show that the average return this year is about 125 per cent.
That’s about 100 percentage points more than the gain for the diversified S&P 500 over the same period, even with notable duds such as Peloton (down 75 per cent this year) weighing on the group average.
Second, interest in meme stocks may be declining, but it remains strong. Trading volume for AMC in New York in November and December, though down from frenetic levels in June, was still nearly 50 per cent above the number of shares trading hands in the same two-month period last year.
Interest in AMC remains elevated in Canada, too, at least among the young investors most closely associated with meme stocks.
The TD Direct Investing Index, which measures investor sentiment and activity each month, showed that AMC was the second most popular equity purchase among millennial and Gen Z investors in November, behind Tesla Inc. By comparison, AMC didn’t crack the Top 5 most popular purchases among older Gen X or boomer investors.
And third, despite concerns that meme stocks are signalling speculative fervour that could drag down the broader market, as the dot-com bubble of the 1990s did, the impact – so far – appears benign. Many major equity benchmarks look set to end 2021 near record highs and with impressive double-digit gains.
Meme stocks aren’t for everyone. Arguably, no one should go near them. But the trend is hardly disastrous, and may be far from over.
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