Is meme stock mania making a comeback?

Remember meme stocks? Some investors will be doing their best to forget all about them after getting their fingers burnt and in that case, we have some bad news.

Meme stocks are back from the dead, according to The Economist.

It reports that meme stocks have shot past the rest of the stock market, with the meme index up nearly 60 per cent so far this year, outperforming the US S&P 500 by about 40 percentage points.

Returns on individual holdings are “more bonkers still”, it added, while acknowledging that many have risen from a low base.

There is a name for what you are feeling while reading this. It's called fear of missing out, or Fomo, so do your best to repress it. It's not healthy.

Meme stocks are typically companies whose shares have crashed almost to nothing and become the unsuspecting targets of investors who pile in, hoping to drive it upwards and benefit from the subsequent sharp rise in volatility.

This year, they include FinTech company SoF, whose stock has doubled, and software maker Palantir, which has nearly tripled. Car retailer Carvana is up 800 per cent.

Shares in struggling homewares company Tupperware Brands jumped 290 per cent in the past month. Defunct retailer Bed Bath & Beyond and bankrupt trucking company Yellow have also become targets.

If you have not encountered meme stocks before and fear you may be missing out on a brilliant investment opportunity, relax. The investment world would be a happier, saner and wealthier place without them.

The first meme stock frenzy took off in January 2021, when online traders on low-cost apps such as Robinhood decided to drive up the shares of struggling video game retailer GameStop, which was being heavily shorted by investors.

Traders mobilised on Reddit subgroup WallStreetBets in a concerted and gleeful manner to wipe out institutional short sellers, who they accused of driving GameStop into bankruptcy and destroying jobs.

And it worked. GameStop’s share price rocketed from $17.25 to peak at $347.51 that month, a rise of 1,915 per cent.

The mania spread to cinema chain AMC Entertainment Holdings and the results were the same. AMC rocketed. Then both crashed.

Those who got in at the top and held to the bitter end lost fortunes. Some woke up from the frenzy to find their retirement savings wiped out. Others borrowed to invest and fell into debt. It was glorious for a while, but it was not investing.

Analysts wrote this off as a spell of late bull market madness, only for meme stock mania to reappear during last summer’s short-lived bear market rally.

The results were identical. Some early birds made money. Most did not. As is the case with the villain in a horror franchise, meme stocks refuse to die.

There is even a meme-focused exchange-traded fund, the MEME ETF from Roundhill Investments that is designed to track the performance of meme stocks.

True to form, it has been volatile. Its share price rose from $6.07 on April 26 to peak at $43.20 on June 30. Today, it trades at about $34. Measured over 12 months, it is down 52.78 per cent.

Giles Coghlan, chief market analyst consulting for HYCM, suspects The Economist may have got a little carried away.

“The volatile and unpredictable nature of meme stocks makes it very hard to say if they are actually back or not,” he says.

Meme stocks are heavily influenced by passing social media trends and the short-term and speculative nature of the subsequent trading makes activity hard to follow, yet he concedes: “It’s likely that meme stocks will continue to rear their head every couple of years in a short-term and cyclical way.”

Mr Coghlan says now is not the time to dabble, with US shares slipping and the Federal Reserve considering yet another rate increase, which could further dampen sentiment.

“Instead of meme stocks, I’d be looking to buy the dips on stocks with AI exposure like Apple, Meta, Nvidia or Amazon,” he says.

Meme stocks will always have a place among a sub-set of retail traders and investors, says Daniela Hathorn, senior market analyst at Capital.com.

“The concept of greed-driven rallies is nothing new and there will always be moments when Fomo takes over rational thinking,” she says.

Social media has magnified the process but the frenzy can only end one way.

“Most meme stocks are struggling consumer discretionary brands with less-than-robust fundamentals. They tend to reverse most of their gains after the initial frenzy is over,” Ms Hathorn says.

This can be seen in the recent performance of the original meme stocks. The latest recovery has bypassed GameStop, whose shares are down by half over the past year, and AMC, which is down 80 per cent over the same period. They are not long-term buy and hold investments.

Bed Bath & Beyond is hanging on by a thread, falling 99 per cent over the past year, says Myron Jobson, personal finance campaigner at Interactive Investor.

“The conditions that sent meme stocks to meteoric heights have now diminished.”

These included what he calls “the accidental savers phenomenon”, where bored investors splurged their lockdown savings on stocks.

“The cost-of-living crisis is now forcing investors to be more conservative with their money,” Mr Jobson says.

The social media buzz has also eased after regulatory clampdowns on irresponsible investment marketing and broader awareness campaigns, he adds.

While risk is an inherent part of investing, meme stock investing is like gambling, according to Mr Jobson.

“It is not a sustainable strategy for building long-term wealth. The odds are heavily stacked against those who attempt to time the market,” he says.

His major concern is that younger investors are most susceptible to meme stock mania, drawn in by posts on Instagram, TikTok and other social media sites.

“This baptism of fire into the world of investing could put the uninitiated off for life and scupper long-term financial goals,” he warns.

There is also a danger that disillusioned investors retreat to the safety of cash and miss out on the superior long-term returns that come from investing in stocks and shares in a more balanced and sensible way.

Actively managed investment funds or low-cost ETFs are a far better place to start, Mr Jobson says.

“A well-diversified investment portfolio helps to cushion the occasional shocks that come with investing in a single asset class or region,” he says.

The problem is that this is also a bumpy road. Aside from Big Tech stocks, global stock markets have disappointed lately and now we seem to be flirting with another crash.

The stock market is not a get-rich-quick mechanism. That results in plenty of scope for fads, frenzies and meme stocks. Meme stocks may make a lucky few rich but most will quickly end up poorer.