How will it all end?
If you thought Monday’s remarkable rally was just a one-day blip, you’ll be sorely disappointed. The surge in meme stocks continues on Tuesday. In fact, some of them are actually speeding up.
Yesterday, GameStop (NYSE:GME) shares surged 74.4% to $30.45. AMC Entertainment (NYSE:AMC) shares rose 78.35% to $5.19. Shares of headphone maker Koss (NASDAQ:KOSS) rose 38.29% to $4.37. Certainly, it’s not just a coincidence that these are all meme stock stars of 2021.
If you’re a short-term trader who just wants to flip this stock for quick profits, I say, “Go for it.” On the other hand, if you’re a serious investor looking at the company as a whole, not just the stock, there’s a lot to consider and you might find some compelling reasons to stay away from the competition.
basic, mental
Fundamentals for GameStop, AMC Entertainment and other companies weren’t very relevant on Monday as there were no company-specific catalysts that could push shares higher. Earnings season is mostly over (though GameStop is still expected to report on June 5), and the April Consumer Price Index (CPI) print isn’t released until Wednesday.
If the company’s financials were adequate, short-term traders should have chosen more promising companies to focus on. For example, GameStop’s fourth-quarter net revenue fell to $1.794 billion compared to $2.226 billion in the year-ago quarter. Additionally, the retailer’s cash and cash equivalents decreased from $1.139 billion as of January 28, 2023 to $921.7 million as of February 3, 2024.
According to AMC Entertainment’s fundamentals, the movie theater chain has approximately $4.5 billion in long-term debt as of December 31, 2023. Moreover, AMC Entertainment’s revenue decreased slightly from $954.4 million in Q1 2023 to $951.4 million in Q1 2024. Recently, the company announced that it sold 72.5 million shares of AMC stock to raise ‘new capital’, raising the issue of stock price dilution.
But the fundamentals were not to their liking during the speculative heat of 2021, when Reddit users and other traders shorted these same so-called “stalks” to dizzying heights. Of course, the financial market landscape was quite different in 2021, when inflation and interest rates were relatively low. Let’s take a look at what sparked this week’s retail trading renaissance.
ValueWalk contributor Dave Kovaleski did a great job summarizing the Monday madness, which saw Redditor and meme stock expert Keith Gill reemerge on social media platform X after several years.
Apparently, this textless post was enough to spark conversation about whether Gill, known as “Roaring Kitty” on X, will return to full form and lead another meme stock rally. But since the market is always forward-looking and everyone wants to get ahead of everyone else, short-term traders continued to drive up the prices of the aforementioned meme stocks, with or without Gill’s help.
At 11 a.m. ET on Tuesday, GameStop’s stock price soared 60% compared to the previous day’s closing price, and AMC Entertainment’s stock price soared 80%. Meanwhile, KOS stock prices rose 33%.
An unexpected group of winners
Broadly speaking, it was small cap revenge on Tuesday morning. The Dow Jones Industrial Average (DJIA) and S&P 500 (SPX) were almost flat on this day, while the Russell 2000 (RUT) rose 1 percentage point. GameStop and AMC Entertainment didn’t actually qualify as small-cap stocks, but overall sentiment favored companies perceived as downtrodden underdogs.
Besides small-cap stocks, other winners on Monday and Tuesday were solar stocks, among others. To name a few examples, SunPower (NASDAQ:SPWR) stock was up 64% on Tuesday morning, and Maxeon Solar Technologies (NASDAQ:MAXN) was up 52% from the previous day’s close.
There’s no point in trying to figure out why Reddit users and other short-term traders may have targeted solar stocks for a short squeeze. Unless you’re in the inner circle among these meme stock heavyweights, we don’t recommend trying to guess the “next” GameStop stock.
That means there will be newly minted meme stock millionaires, but you probably won’t be one of them. Take a look at how the last story ended. The most popular meme stocks lost significant value in 2022, 2023, and early 2024.
I can’t imagine that this bypass has a more advantageous solution than the previous one. Ultimately, prudent investors are better off sticking to time-tested principles and focusing on fundamentally sound businesses. Otherwise, you may miss the end of an exciting but largely irrational pop-and-drop cycle.
