The ‘fringe of investing: Another version of the meme stock craze is back with different ramifications.
Retail traders are obsessed with meme stocks again as volume for shares of Bed Bath & Beyond (BBBY) – Get Bed Bath & Beyond Inc. Report, AMC (AMC) – Get AMC Entertainment Holdings Inc. Class A Report and GameStop (GME) – Get GameStop Corporation Report are ramping up.
The catalyst for the recent surge in these stocks is because Ryan Cohen, chairman of GameStop, said he plans to sell his stake in Bed Bath & Beyond.
A filing on Aug. 18 revealed that he sold off his entire stake in the home goods retailer.
Why Bed Bath & Beyond Shares Rose
Shares of Bed Bath & Beyond plummeted by 19.63% at the market close on Aug. 18 after Cohen indicated in a Form 144 filed with the Securities and Exchange Commission on Aug. 16 that he plans to sell his stake. Cohen owns 9.45 million shares of the retailer through his company, RC Ventures.
“I think it was a masterful move by a person with a huge media following to extricate himself from a bad position that he put on earlier this year,” Steve Sosnick, chief strategist for Interactive Brokers, told TheStreet.
The founder of Chewy, the pet products retailer, Cohen has been an activist investor and first said he had almost a 10% stake in Bed Bath & Beyond in March. RC Ventures also has call options exercisable for 1.67 million shares.
Cohen still has a “pretty devoted following” on the message boards such as Reddit’s Wallstreetbets page, Art Hogan, chief market strategist at B Riley Financial, told TheStreet.
“I thought we put it in the rearview mirror,” he said.
The latest meme stock frenzy has expanded to other stocks, including Blackberry (BB) – Get BlackBerry Limited Report and Revlon (REV) – Get Revlon Inc. Report.
The strategy behind this latest mania is similar to the one in January 2021.
“It feels like the same tactics were put in place and the traders all pounce on a name and are relatively relentless,” Hogan said. “Commission-free trades are the driver.”
Meme stocks tend to focus on stocks that are the most heavily shorted. “When you use options, usually out-of-money calls and that can create self-fulfilling moves,” he said.
The Outcome of Meme Stocks
Retail investors lost money during the last meme stock craze in 2021 and the circumstances are very similar, because they are speculators and not investors, Hogan said.
“I suspect like all manias in the marketplace that this one will have the same ending and it will not be pretty,” he said “These things don’t end well and are not fundamentally driven. They are on the very speculative fringe of investing.”
The stocks that experienced “explosive” growth and were pandemic darlings such as Zoom Video (ZM) – Get Zoom Video Communications Inc. Report and Peloton Interactive (PTON) – Get Peloton Interactive Inc. Report have not bounced back and have suffered the same fate as SPACs, Hogan said. GameStop rose from $5 to $86.88 and is now trading at $37.93.
“There will always be a new game in town and I don’t think this is it,” he said.
How Retail Investors Should React
Retail traders should view meme stocks as entertainment and ignore it as an investment, Hogan said.
“The fad is here now and gone tomorrow and has collapsed in front of us,” he said.
Investors who were long on these stocks should view the latest rise in their valuations as a “great opportunity to sell,” Hogan said. “The best thing is to sell and move on and look at it as a quarter in a slot machine.”
Market makers provide liquidity to the equity markets and make money on every trade from the volume. Very few hedge funds have gone out of business from the meme stock revolution despite retail traders believing that they had beat Wall Street and its institutional players, he added.
“You’re just making those guys rich and have not brought Wall Street to their knees,” Hogan said.
Market makers and aggressive institutional trading accounts got caught offside in the first meme trading craze, but they learned their lesson and have not participated in this latest mania, Sosnick said.
“Market makers at investment firms commit to hosting two-sided bids and asks in stocks or options,” he said. “When they see the horns of the bull coming, they will step out of the way. If there is enough liquidity, the market marker does not have to do anything.”
Retail investors, especially those that are new to the market, need to be careful chasing after the flavor-of-the-week meme stocks, Jason Spatafora, co-founder of MarijuanaStocks.com and partner at True Trading Group, told TheStreet.
“Most do not understand the risk or realize that proper risk management is what gives investors longevity in the markets,” he said. “Meme stocks are the greatest game of musical chairs that currently exists in the market.”
Many retail investors do not have the “skill set to compete against seasoned veterans who can anticipate the drops in real time,” Spatafora said.
“The first thing I teach is risk management,” he said. “Buying lotto tickets isn’t a strategy, it’s a way to lose money and sour yourself on the market.”
“The problem is if you’re among the people who are early to these meme stocks eruptions, then you can do incredibly well for yourself
Most retail investors do not really catch onto the meme stocks until it is in full flourish, Sosnick said.
“A lot of people who bought higher are looking at a loss now,” he said.
Instead, retail investors should look at the fundamentals of a company whose shares have declined by a large percentage, Sosnick said.
“From a fundamental basis, most of the meme stocks are trading at a valuation that is very high from a conventional measure,” he said. “A large proportion of the valuation premium is a result of their meme status.”
While a stock’s meme statuses can linger, the “half life of these meme interruptions tend to be shrinking,” Sosnick said.