Meme stocks – what is behind the hype?

A phenomenon known as “meme stocks” is back. Investopedia defines meme stocks as “companies that have gained a cult-like following on social media”. They became widely known in 2021, featuring stocks of companies like GameStop and AMC Entertainment. GameStop’s price, for instance, rose 100-fold over several months as its meme community created a short squeeze.

Keith Gill, also known as Roaring Kitty, was at the heart of the phenomenon. He led the stock frenzy in 2021, but then vanished. He reemerged on May 12, tweeting a wordless image of a gamer engaged in play. The following day on market opening, GameStop (GME), one of the most famous meme stocks, doubled intraday, with market cap rising by $5 bn.

“First, the U.S. had a smallish (compared to 1999/2000) stock market bubble peaking in 2021. Meme stocks were a colourful but relatively unimportant symptom of that bubble, which featured nonprofitable tech and crypto-related firms. So to the extent that May 2024 has the same vibe as January 2021, that could be a minor red flag,” says Owen A. Lamont, Portfolio Manager at Acadian.

“Indeed, the speculative behaviour (one-day options are effectively lottery tickets) could indicate a potential bubble. While not definitive evidence, we see this as a red flag. Investor sentiment is bullish and therefore also vulnerable to change,” opines Christopher Teschmacher, Fund Manager at LGIM.

“In a US election year, this feverish behaviour is a reminder of the influence of social media and of retail investors in markets. According to Pew Research, half of US adults get at least some news from social media,” adds Teschmacher.