Nothing about the investment fundamentals made them look like a buying opportunity. But that’s their appeal to the army of online investors who use the collective power of social media to buy the stock and buck the establishment.
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Most of these companies have been short sold by large conventional investors (which means the smart money has placed a bet on their shares going down.)
So a bunch of small punters piling in and pushing up their shares looks something like the revenge of the uninformed with a lashing of cognitive dissonance.
But swimming against the investing establishment is precisely what meme stocks are playing out.
It has a certain David and Goliath feel to it.
When the first meme wave hit during the COVID-19 pandemic, institutional shareholders that had placed bets on stocks falling were financially injured – some sustaining third-degree burns.
Meme stock GameStop had a dizzying rally as bullish day traders kept the upper hand over short sellers. Credit: Bloomberg
That meme craze was played out at a time when retail investors were flush with funds from government stimulus programs and had time to spare thanks to lockdowns.
The second meme wave is now hitting, and these retail punters are (to butcher the Prince lyric) partying like it’s 2021.
Most of these first-wave meme stocks, such as theatre group AMC and GameStop, saw their shares return from the stratosphere. But the meme phenomenon inspired the film Dumb Money, in which a bunch of working-class traders beat the system and made a fortune.
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It is difficult to know how a meme stock is chosen, but for the most part, there are common features.
They are usually underperforming businesses that are in competitive industries and are often structurally challenged – AMC and GameStop fit these parameters very neatly.
In most cases, they are still household names or operate strong consumer brands that the community can recognise – such as Krispy Kreme and Kohl’s.
Rocket Lab is a little different from the pack in this regard. Although it has a market capitalisation of around $30 billion and is yet to make a profit, its shares had already taken off thanks to launching several satellites.
But all have been the target of short selling and now revenge buying.
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