By Philip van Doorn
Every day the meme stocks dominate the financial media. And rightly so — they are illustrating the power of communications, as traders and investors seek to follow momentum to big profits.
It’s easy to dismiss the phenomenon, because it isn’t based on companies’ traditional measures of profitability or sales growth, ratios of share prices to earnings or sales, or even innovative products or services. But so much money is trading around these stocks that you should at least learn about what is going on.
Traders trying to understand the momentum and make quick gains will, of course, look at daily trading volumes and the immediate direction of share prices. But there are also measures of momentum among people communicating in Reddit’s WallStreetBets channel and other social media. One of these, called a “social sentiment analysis,” was developed by HypeEquity and described here by Thornton McEnery.
But you might also be interested in whether any of these stocks might make good long-term investments. Or you may want to see financial information and standard stock valuations for the meme stocks, as part of your arguments against them.
The meme stocks
In talk of meme stocks, there is an acronym, BANG. BlackBerry Ltd. /zigman2/quotes/202784246/composite BB -1.81% is the first of the group of four, which also includes AMC Entertainment Holdings Inc. /zigman2/quotes/200235402/composite AMC -8.38% , Nokia Corp. /zigman2/quotes/207421390/composite NOK -0.54% and GameStop Corp. /zigman2/quotes/203755179/composite GME -12.45% . But there are four other meme stocks that have had a lot of recent social-media buzz and trading activity that we can add to make a list of eight.
Here they are, sorted by market capitalization in millions of dollars:
All of the listed meme stocks’ valuations have rocketed, although only by double digits for Nokia and Bed Bath & Beyond /zigman2/quotes/209801102/composite BBBY -46.93% .
The boards of directors of AMC and GameStop each took advantage of the excitement among traders and sold new shares to the public to raise billions of dollars. AMC announced and completed the sale of 11.55 million new shares June 3.
What started this year’s meme-stock craze was an opportunity described on WallStreetBets to create short-squeezes on heavily shorted stocks.
Here’s a definition of short-selling and its risks:
Short selling is when an investor borrows shares and immediately sells them, hoping to buy them back later at a lower price, return them to the lender and pocket the difference.
Covering is when a person with a short position buys the shares to return them to the lender, hopefully to profit if the shares have gone down in price since they were shorted, or to limit losses if they went up after being shorted.
A short squeeze is when many investors looking to cover short positions start buying at the same time. The buying pushes the share price higher, making short investors accelerate their attempts to cover, which sends the shares spiraling higher in a frenzy.
So you have unlimited risk if you short-sell stock — you never know how high its price might go. If you buy shares outright (that is, take a long position), you have only risked the amount you invested.
If you have shorted a stock and its price has gone the wrong way — up — your broker might make a margin call, which means you need to deliver cash to cover the broker’s risk. Short-sellers are told these rules by their brokers before entering short trades. But the margin requirements can lead to short squeezes when investors run out of cash. Brokers will force-sell the shares if the required cash margin isn’t maintained by the investor/trader.
So at the early stage of meme-stock mania, the WallStreetBets crew was able to buy shares of heavily shorted stocks as a group, which drove their prices higher and even led to covering (at losses) by professionals. The resulting short-squeeze made a lot of money for traders whose timing was right. And the buzz has continued since then as the meme stocks have bounced up and down.
Here’s a year-to-date chart showing total returns for the BANG stocks through June 3:
How much short interest is there now for this group of eight stocks? Here they are, ranked again by market cap:
FactSet’s data on short positions as a percentage of shares outstanding is updated twice a month, with the second update around the 25th day of the month.