Meme Stock Speculators Are At It Again
The so-called meme stocks are making news this week and some investors are trying to understand what is going on. Let us first define a meme stock, which is a publicly traded company that is talked about on social media sites like Reddit and speculators are coming together to bid the price of the stock up.
We must go back to last year to begin to understand how this frenzy came about. The COVID-19 pandemic caused a lot of people to be laid off from work and with the extra free time, these people began to treat the stock market like a casino by making big bets on low priced stocks.
Young people began to coordinate on social media platforms with the intention of bidding up these meme stocks and making a big profit, which has caught the eye of many.
Normally when an investor purchases a stock, they research the company and then discount the expected future cashflows to arrive at a fair price. Therefore, the price of the stock is linked to the fundamentals of the company. So, a good company with great expectations of future cashflows is worth more and investors are willing to pay up by driving the price higher.
However, the price of these meme stocks are not tied to the fundamentals of the companies. Most of these types of stocks are companies with poor outlooks and shaky fundamentals. Nevertheless, the price has skyrocketed.
Over the last five days, AMC Entertainment Holdings, Inc (Ticker: AMC) has increased 176% as speculators have coordinated an effort to bid the price up. Year-to-date AMC is up 2,454% yet the fundamentals of the company are poor.
There are other meme stocks that have experienced the same euphoria. At the start of the year GameStop Corp (Ticker: GME) shot through the roof from about $17 a share to almost $350 in a matter of weeks and then fell to $50 shortly after.
These meme stocks are very speculative and the only reason why they go up is because the person purchasing shares believes they will be able to sell to a greater fool that will pay more. This will not end well for most people, but unfortunately many people are trying to make a quick buck.
At Surevest, we would rather focus on sound fundamental principles that have stood the test of time. We believe having a sound financial plan that is aligned to a well thought out investment strategy is the best way to go. We will leave the meme stock speculation to the novice.