Should we be worried that meme stocks are back in fashion? I think so. Traditionally associated with lower-quality companies, the fact traders are chasing these types of names could be seen as being top of the market behaviour, certainly for the US where returns have been very good in 2023.

Big money has been made on companies classified as meme stocks this year. For example, food container group Tupperware (TUP:NYSE) saw its share price rise by a dramatic 379% in the eight days to 28 July. That’s quite a move for a company which warned four months ago that it needed more cash or it could go bust.

Even more fruitful has been online used car retailer Carvana (CVNA:NYSE) with a 774% share price gain year-to-date. It recently announced a plan to reduce debt while also reporting better than expected results. However, less than a year ago the company was cutting jobs and was surrounded by speculation of bankruptcy.

What unites both Tupperware and Carvana is that both companies are seen has being damaged goods, businesses with a multitude of problems that need fixing. They are also heavily shorted by people hoping to profit from a falling share price. That’s two of the three core ingredients for a meme stock, the other being a hot topic of discussion on social media.

Traders have been known to target stocks with these ingredients with a view that mass buying of the shares will push up the price and cause a short squeeze. They want to ride that ‘squeeze’ and achieve supersized returns. It’s a risky strategy and meme stocks have shown to be extremely volatile, falling as fast as they’ve risen.

If you want a list of which companies qualify as meme stocks, look no further than the holdings of the Roundhill Meme ETF (MEME:NYSEARCA). It follows an index of companies that are being talked about on social media and are being heavily shorted. The index is rebalanced every two weeks.

What’s interesting is that the current portfolio isn’t restricted to broken companies, as one might expect with meme stocks. Yes, it includes a rogue’s gallery of battered and bruised firms, but you also get companies that have been delivering good news. This includes cruise ship operator Carnival (CCL) and fantasy sports betting operator DraftKings (DKNG:NASDAQ).

Carnival is up 133% year-to-date as the cruise industry has seen a surge in demand while DraftKings is up 190% this year thanks to better-than-expected results and growing interest in fantasy sports betting.

That suggests the current meme stock craze is not simply about chasing zombie companies like it was last time. It might also be classic momentum investing – buying into stocks that are going up, albeit with the extra filter that these names need to be heavily shorted.

Chasing stocks simply because everyone is talking about them is a fool’s game. Long-term investors should look elsewhere for financial gains.

‹ Previous2023-08-03Next ›