Send in the Clowns

Send in the Clowns

Help! I’m Trapped in a Box!

Oh look, now I’m walking against the wind with an umbrella.

If either of these images conjure up a black and white striped clad performer in face paint, you understand what a mime is.

Which is not to be confused with a “meme” or in this case, a meme stock. Both of which tend to leave you with a bad taste in your mouth and be anything BUT entertaining.

If you have paid any attention to social media or the financial channels, you have heard the phrase “meme stock” in alternating tones of reverence and disgust depending on the day.

So what exactly is it, and where do meme stocks fit in your portfolio?

The two OG (original gangster) meme stocks were GameStop (GME) and AMC Theaters (AMC). Both stocks rose to prominence in 2021 when a diehard group of retail investors formed an online support community on Reddit to support these companies. The initial approach was innocuous enough; both companies were beloved by investors who hated the level of “short-interest” (the number of institutional investors who had “shorted” the stock i.e.; wagered through options and other sophisticated financial instruments that the stocks were going lower.

This did not sit well with the mostly millennial investors who bemoaned the “evil hedge funds” who they felt manipulated the markets and were artificially crushing these businesses.

The reality is those short positions were clearly justified.

short selling in the stock market
Reddit users coalesced around popular brands shorted by institutional investors and helped prop up the stock price for AME and GameStop brands.

Both companies had been long suffering financially, and their stock prices did not truly reflect the level of internal rot the belied both stocks.

GameStop is a traditional brick-and-mortar company that buys, sells, and trades video games, and they were a frequent denizen of another ailing behemoth—the mall. Add to the issues that most games are now bought and sold through the internet or downloaded directly through the gaming system, and you added one more nail in the proverbial coffin.

AMC suffered from the one-two combination of the shutdown of theaters during the pandemic, while online platforms like Amazon and Apple continued to put new releases direct to consumers via smart televisions. Further securing the notion of “Netflix and chilling” and keeping consumers from theater properties.

Bed, Bath, and Beyond (BBBY) joined the ignoble ranks of the meme stocks recently, when it was revealed that activist investor and founder of Chewy.com, Ryan Cohen, acquired 10% of the company’s stock in March. He had purchased a significant amount of “call options” (the right to buy additional stock at a preset price on a preset date) which all appeared to be bullish for BBBY and sent the stock prices soaring to over $30 a share.

Like AMC and GME, Bed, Bath and Beyond was struggling financially, and was still engaged in a CEO search after having fired former CEO Mark Tritton who oversaw a failed design layout for the stores, which further alienated consumers.

Retail investors applauded Cohen’s move. Up until he disclosed that his company had sold off all of their holdings last week, causing the stock to plummet from $30 to $11.

Shares of Bed, Bath, and Beyond rose only to plummet after an activist investor liquidated his shares of the beleaguered stock at the high-point of its market price.

Did we mention that Cohen also happens to be the Chairman of GameStop?

The one consistency with all of the meme stocks is the amount of volatility and significant price swings often on zero news. GameStop has seen a trading range of $347 to $27 over the past year; all while the stock sports a MINUS $6.29 estimated price per share. AMC’s range has been $9.20 to $62.50 over the same period and sported a more modest MINUS $2.05 price per share.

The second consistency when it comes to meme stocks is the fleecing of the average investor.

While it may be “noble” to support a beloved brand particularly against the so-called evil empire that hedge funds allegedly inhabit, but the reality of the situation is abundantly clear. Hedge funds have more money than individual investors and can ride out the volatility or utilize additional financial instruments to mitigate the volatility.

To put it another way, as legendary investor John Maynard Keynes once said, “The market can stay irrational, longer than you can stay solvent.”

Which is not to say you can’t win. A 20-year-old USC student netted a cool $110 million in profits by closing his Bed, Bath, and Beyond with impeccable timing, having bought at $5.50, and sold at $27. Clearly, he should no longer be concerned with tuition debt forgiveness.

Leave the meme stocks to the gamblers and the speculators. They are not for investing, especially not a meaningful portion of any investment portfolio.

Instead, sit back and enjoy the ride. The show is as entertaining as anything else on Netflix!

 


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