The recent interest in amateur investing spurred on by social media has some establishment analysts worried about the potential fallout when the bubble bursts. During a discussion with Yahoo Finance, Jenny Johnson, the CEO of Franklin Templeton, warned that meme stocks could be an extremely volatile investment for many newcomers to the market.
”And then to the extent on the meme stocks, look, I never like investing where there isn’t fundamentals behind it. And I think the challenge with things like the meme stocks, yeah, if you time it right, you’re going to do great. On the other hand, you could lose everything.”
Johnson’s warning echoes that of other industry mainstays who are warning that so-called meme stocks are tough to predict because they’re nothing like any existing investments. Much like cryptocurrency, meme stocks are valued almost solely on the attitudes and outlook of enthusiasts.
“You Could Lose Everything”
The main reason why analysts are worried about this new class of amateur investors losing all of their money in the stock market is that they have a tendency to view their investments as an all-or-nothing gamble. Even as the price of Reddit’s favorite meme stocks dips, enthusiasts encourage one another to not sell out and to “buy the dip,” shoring themselves up for a huge run-up in the stock that could never materialize.
Perplexingly, these same enthusiasts seem to be against the idea of selling simply on principle. Selling their shares would be tantamount to giving up, according to the faithful on subreddits like r/WallStreetBets. The point isn’t about making money for these meme investors, but about sending a message to Wall Street hedge funds.
Looking at Memes Critically
Trying to apply scientific thinking to the motivations and actions of an online, meme-driven movement could be an exercise in futility. That hasn’t stopped some analysts from trying, though. David Saito-Chung, writing for Investor’s Business Daily, has tried to get a grasp on one particular meme stock: AMC.
Saito-Chung writes that, in spite of the news that AMC had their best weekend of the year thanks to the release of the Marvel film Black Widow, their shares are still slipping from their earlier highs. AMC declined to sell more shares earlier in July, a move that excited retail investors but left Wall Street incredulous. Such a sale could have been a critical way for the theater chain to tackle their outrageous debt, according to some analysts.
“Some observers have expressed concern over the company’s huge debt load ($5.4 billion in borrowings due one year from now or longer, as of March 31) vs. total assets ($10.5 billion) on the balance sheet,” Saito-Chung notes.
The Run Up Must Come Down
While Reddit-fueled runs on heavily-shorted stocks can work in the short term, Wall Street analysts warn that it’s not a sustainable form of growth. Short sellers, investors who borrow stocks and sell them at their current prices with the expectation that the shares will be cheaper in the future, can get burned on their investments if the shares increase in value in a short period of time.
The chain reaction of interest from social media in a given stock driving its price higher can lead to short-sellers scrambling to cover their positions, buying back stocks they borrowed at a much higher price. This buying frenzy, called a short squeeze, can cause short-term gains for the stock. In spite of this, investors who choose to keep their money in these shares even after the squeeze are flirting with disaster.
The main issue now facing meme investors is whether the social media-driven nature of their investments will continue. Investing in struggling companies like AMC, GameStop, and Blackberry worked at first due to the shock factor of squeezing out short-sellers who couldn’t have foreseen an organized run on the stock.
However, as time goes on, analysts believe that these unusual “meme” patterns will level off, and the stocks will need to rely on fundamentals. Namely, the businesses that issue these shares will need to actually start making money.
This is easier for some meme stocks than others. AMC, for instance, does actually seem poised to reverse its fortunes. Many of their locations are finally open after a rough period of shutdowns for theaters nationwide. The company has used its windfall from the meme stock interest to pay off some debts and to purchase new theater locations.
Others, like GameStop, face a more uncertain future. The video game retailer is caught in a tough market, where many gamers prefer to buy their games digitally, directly from the storefront offered on their console. Meanwhile, the company is trying to pivot to an online-driven business model that Reddit enthusiasts claim will reverse their fortunes and make their stock skyrocket.
Redditors on popular trading forums remain irreverent about the whole thing, making the dire warnings from Wall Street seem like alarmist rhetoric instead of genuine financial advice. Are retail investors laughing while the world burns, or have they happened upon a new normal for the markets?