How to Play the Return of Meme Stocks

Lou Basenese

Tuesday, November 2, 2021

Don’t look now — but meme-stock mania is back!

But here’s the thing:

As Business Insider reports, “The two stocks (GME and AMC) that started the meme-themed party are being left out of it.”

Instead, the new poster-children for the online trading frenzy appear to be Remark Holdings, Inc. (MARK) and Phunware, Inc. (PHUN).

In a recent six-day period, these stocks soared a staggering 280% and 670%, respectively. But don’t you dare rush out to buy these stocks!

Today I’ll explain why you need to avoid them…

And of course, I’ll reveal what you should be doing instead to turn this reawakened mania into reliable profits...

3 Pitfalls to Rapidly Rising Meme Stocks

I’ll confess, as a classically-trained fundamental analyst, the massive moves being made by meme stocks make no sense to me.

Essentially, there’s no way to justify how business sectors destined for obsolescence, like video games and movies, are soaring. And yet, GameStop (GME) is up 810% in 2021 and AMC Entertainment (AMC) is up 1,649%.

Nor can I make a fundamental case that any stock is worth 670% more than it was a week ago, given zero changes in its underlying business.

And this brings us to the first pitfall to putting capital at risk in a meme stock:

Meme-Stock Reality #1: FOMO is not an investment metric. The only factor that’s driving shares of these terrible companies higher is an army of new retail investors. And these investors operate based on the “fear of missing out” (FOMO) more than anything else. This fuels runaway-buying at the expense of rational investing. But as we know from previous bubbles including the dot-com meltdown (where countless new metrics were literally made up to justify unjustifiable speculation), this type of investment strategy isn’t sustainable. Rest assured, this time is no different. And the last thing I want to do is be the last person with FOMO who buys a meme-stock at the top. Speaking of which...

Meme-Stock Reality #2: Frontrunning randomness is not possible. Whether it’s StockTwits, or the Wallstreetbets channel on Reddit, or any other loosely organized group of everyday investors, it doesn’t matter. Every major meme-stock move was precipitated by an increase in online chatter. But it’s impossible to predict which company will be targeted next. After all, you can’t frontrun randomness. But if you wait for a major uptick in online chatter before you buy, that means you’re certainly not the first to know — and therefore, you’re paying much higher prices (see Risk #1 above). This isn’t an investment strategy! Before meme-stock mania, we called this the “Greater Fool Theory.” A flawed strategy by any other name is still a flawed strategy.

Meme-Stock Reality #3: Fortunes created rapidly can evaporate just as quickly. One of the hallmarks of most meme-stocks is an extremely small float. That means they have a very low number of shares outstanding. That’s why any hype-driven buying naturally drives the stock price much higher, as only a scarce number of shares are available. But guess what? Hype cuts both ways. Just as this phenomenon can run a low-float stock up rapidly, when the hype fades, it can destroy a stock price just as fast. Sure enough, if you pull up the stock chart for most meme stocks, the first massive move higher is often met shortly afterwards by a downturn of the same magnitude. I’m sorry — but round-tripping stocks is not a way to build wealth; it’s just a way to increase anxiety about missed profits.

Don’t Bet Against Main Street

So, should we turn our backs on all this meme-stock mania?

Of course not!

While the investment strategies (if you can call them that) of the movement are doomed, the reality is that a revolution is underway in retail investing.

With spare time and plenty of stimulus money on their hands thanks to the pandemic, an army of everyday investors has taken Wall Street by storm.

The most important realization of all?

This retail investing surge isn’t a passing fad!

That’s why, in my next column, I’m going to show you the only smart way to leverage this new trend for reliable profits. So stay tuned...

Ahead of the tape,
Lou Basenese
Lou Basenese

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