Term of the Week: Meme Stock

The financial definition you need to know this week

Key Takeaways

• Meme stocks made headlines this week as heavy trading activity in GameStop, AMC Entertainment, and other stocks drew speculation of a meme stock resurgence. 
• GameStop and AMC Entertainment shares soared on Monday and Tuesday, before dropping sharply later in the week.
• The two-day rally to start the week was largely attributed to the online return of Keith Gill, a key figure in the meme stock craze of 2020 and 2021.

Meme stocks made headlines this week as heavy trading activity in GameStop (GME), AMC Entertainment (AMC), and other stocks drew speculation of a meme stock resurgence. 

GameStop and AMC Entertainment shares soared to start the week on Monday and Tuesday, sparked by the online return of Keith Gill, a key figure in the meme stock craze of 2020 and 2021. However, both stocks reversed course Wednesday and continued to fall through Friday’s close.

Despite dropping sharply Wednesday through Friday, both stocks posted gains for the week, with GameStop shares finishing 27% higher for the week at $22.21, and AMC registering a gain of 51% at $4.40 as of Friday’s close.

What Is a Meme Stock?

The term gained popularity in 2020, when an online group of retail traders flocked to buy GameStop shares after a YouTube video went viral from a user named Keith Gill, also known by his online persona “Roaring Kitty.” The video detailed a path for GameStop’s stock price to rise to $50 from $5. Gill and activist investor Ryan Cohen, who eventually became GameStop’s CEO, led a collection of retail traders largely from the r/WallStreetBets subreddit group to buy and hold GameStop shares.

Because of perceived weaknesses in the business models of GameStop and AMC as movies and video games had shifted to the digital space, a number of large hedge funds took up large short positions on the stocks, effectively betting that the companies would fail.

Gill, Cohen, and the group of retail traders believed that the higher they drove the share prices, the more financial pain they could cause to the multibillion-dollar hedge funds. By driving shares higher, they could squeeze the funds out of their short positions, forcing them to buy shares to cover their losses, driving the stocks even higher.

A number of other stocks have also achieved meme stock status, with retail investors rallying to support struggling businesses like Tupperware Brands (TUP), BlackBerry (BB), and Bed Bath & Beyond as well.

At the peak of the meme stock frenzy in 2021, GameStop shares reached highs over $80, and AMC above $300. However, GameStop, AMC, and many other meme stocks weren’t able to hold those levels for long. Gill stepped back from public life in June 2021, the hype around GameStop and AMC eventually faded, and despite the recent surge in interest, GameStop and AMC haven’t reclaimed their 2021 highs.

Why Are Meme Stocks in the News This Week?

Sunday evening, Gill made his first post to social media in nearly three years, and has followed up with dozens of posts since. Many of the posts used quotes from a variety of TV and movie scenes alluding to his return after an extended absence.

In the first morning of trading after Gill’s return, GameStop shares soared, with activity levels leading to a number of trading halts. AMC shares followed, with some other meme stocks such as Tupperware and BlackBerry rising to a lesser extent.

However, Vanda Securities analysts noted that inflows into GameStop and AMC on Monday and Tuesday were “a fraction” of the levels seen at the peak of meme stock mania, and expressed skepticism of whether the latest meme stock hype could lead to a repeat of 2021. They suggested hedge funds and other institutional investors are also likely better prepared now than they were in 2021.

Ihor Dusaniwsky of S3 Partners wrote in a Tuesday note that while “a significant amount” of short sellers could be squeezed out of their GameStop and AMC positions, another wave will likely follow them to bet on the stocks falling like they did following the 2021 spikes.

Read the original article on Investopedia.