Meme stocks | New asset class | 20 minutes study

July 8, 2021

I like to spend time to read hours about meme stock and this new asset class. Reading is more efficient compared to other ways.  

This week alone retail traders added a bevy of new names to the list. The term, which once described a handful of companies including GameStop, AMC Entertainment, BlackBerry, and Bed Bath & Beyond, has ballooned in recent weeks to new names. Some, like Beyond Meat and Wendy's, are well-known, while others, like Cleveland Cliffs, Clean Energy Fuels, ContextLogic, and Invesco Mortgage, are more obscure.

Among the names new and old, Maley said one thing is for sure: meme stocks are generally "out-of-favor stocks" on Wall Street.

Travis Rehl, the founder of Reddit investing tracker HypeEquity, said it's a little more than that. Meme stocks, unlike other equities, aren't governed by the company's fundamentals or technicals. "They're governed by nostalgia or interest or a common connection," he said.

Once there's a community connection - such as Millennials' nostalgic attachment to growing up with GameStop as a local fixture - then there has to be opportunity in the stock, and that opportunity has to materialize.

"If those three things line up, you submit yourself as a meme stock," Rehl said.

Darren Schuringa, CEO and founder of New York-based ASYMmetric ETFs, said meme stocks are defined by their followers.

"It is the amount of people that are following and talking and communicating on a specific stock," he said. The social-media savvy followers leverage online forums to gain steam around certain stocks quickly, he said.

As for the stocks themselves, they're generally riskier bets. "A lot of what I see is speculation," he said. "That is another characteristic behind this stocks is this is a way I'll get rich quick."

Not always a short squeeze

The GameStop episode in January was defined by the so-called short-squeeze. Under the right conditions, Redditors found that certain stocks with high short interest, mostly from hedge funds, could be "squeezed", making it costly for the short sellers while also driving up the price of the shares as they close out positions to cover losses. Both GameStop and AMC were heavily shorted stocks, and high short interest became an early defining feature of meme-stocks.

But it isn't always about the short-squeeze, Rehl said.