The Resurgence of Meme Stock: Is Now the Time to Buy?

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MEme shares are making a triumphant return as the market has rebounded from June lows. The meme stock movement originally started in the summer of 2020 when the world was in lockdown due to the coronavirus pandemic. With the general population stuck at home, many people have flocked to social media (and the stock market) for ways to make some extra money.

When stocks initially sold off sharply in response to the virus outbreak, many individual companies became extremely undervalued. Combined with a high level of short interest, conditions were ripe for explosions to the upside. And so the meme stick crusade was born.

Social media platforms like Reddit serve as a central hub for traders to post mentions, opinions, and company-related news. In the past, this heightened awareness has caused these stocks to go viral – catching fire across the internet and playing a major role in precipitating stock prices.

In early 2021, meme stocks became favorites among retailers as they quickly skyrocketed in price on a sudden surge in online interest. Some might have thought meme stocks were dead after their flame died out earlier this year, but the individual stock rallies over the past few months suggest otherwise.

Are Meme Stocks Worth the Risk?

As fundamental analysts often point out, trading meme stocks can be very risky. Newcomers to retail learned this last year — stocks can fall in value just as quickly as they can rise. But characterizing meme stocks as too risky overall may be suboptimal for many traders out there. If you approach them with a proper strategy, you can make significant profits while avoiding significant losses.

Implementing a stop loss is a good idea in most situations, but it becomes even more important when the volatility of the underlying vehicle increases. Trading is primarily about controlling risk. Letting winners run and capping losers early is the secret of successful portfolio management and separates the novice from the pro.

An overlooked thought that’s often left out of the conversation about meme stocks is this: Big gains tend to follow big moves down. Similar to the sharp decline in the first few months of 2020, this year was marked by a significant drop in share prices. The idea is that when stocks become severely oversold, the conditions for sudden, volatile moves ripen as short sellers are squeezed out of their positions. Combined with increased awareness via social media, it tends to result in huge wins in a relatively short amount of time.

These three meme darlings are on their way

AMC Entertainment Holdings AMC, a Zacks rank #3 (Hold), found a bottom in May well ahead of the major indices. AMC stock has since plummeted 135%.

Image source: Stock Charts

AMC has beaten earnings estimates in three of the last four quarters, posting an average increase of 16.48% over the period. Revenue is expected to rise 71.31% this year to $4.33 billion, a positive sign for investors in AMC Entertainment Holdings stock.

Bed Bath & Beyond BBBY, a Zacks Rank #5 (Strong Sell), appears to have bottomed out in July, slightly later than the major indices. BBBY has seen better days in terms of earnings releases as the struggling retailer has missed estimates by a wide margin in each of the previous four quarters.

stock charts
Image source: Stock Charts

Still, BBBY stock is up 190% since its bottom, and there could still be more upside. While earnings and revenue trends are negative, Bed Bath & Beyond traders may find the company’s transformation plan favorable.

Gamestop GME, a Zacks Rank #4 (Sell), was the original meme stock. Interestingly, it looks like GME stock bottomed back in March. The video games retailer also seems to have been struggling with earnings results lately, as estimates were missing in each of the last four quarters.

stock charts
Image source: Stock Charts

But much like its meme friends, GME is up 109% since March. Traders may be looking past the stiff competition from Gamestop as the stock may still have some headroom.

Should You Invest?

The decision to invest in meme stocks depends on the individual and their risk appetite. As we discussed, controlling drawdowns is the top priority. But significant gains are achievable if a proper strategy is executed.

It’s safe to say – the meme stock movement is still alive and well.

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GameStop Corp. (GME): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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