Meme Stocks Soar, Outperforming S&P 500 by 40%: Bull Market or Risky Business?
Last year was undoubtedly tough for investors, but those who frequented Reddit forums faced even greater challenges. The Roundhill Meme exchange-traded fund, which tracks meme stocks, saw a significant decline in share price from $70 to $25. The COVID-19 bubble also burst for non-fungible tokens (NFTs) and SPACs (blank-cheque IPOs), leaving retail investors with limited options – either hold on for dear life or cut their losses.
However, premature declarations of the death of meme investing may have been hasty. Meme stocks are now surpassing the rest of the market, which has experienced its own surge. In fact, the meme index has risen by nearly 60% this year, outperforming the S&P 500 by around 40 percentage points. Individual holdings have seen even more astounding returns, despite some stocks starting from a low base. SoFi, a fintech firm, has seen its shares double, while Palantir, a software-maker, witnessed a nearly threefold increase in market capitalization. Carvana, a car retailer, has experienced an astonishing 800% surge in stock prices. Some retail investors have gone all-in, investing their entire 401k retirement plans. This undeniable evidence points to a clear bull market.
To some extent, some of these stock rallies can be justified. Redditors view positive news as a catalyst for skyrocketing share prices. Carvana, for example, was on the brink of bankruptcy but managed to avert a crisis by providing additional collateral in exchange for a debt cut. Palantir is capitalizing on the surge in demand for artificial intelligence. Furthermore, a judge in Delaware recently rejected plans that would have diluted shareholders in AMC, an early meme stock.
Nevertheless, there are instances where the rallies in meme stocks are more difficult to explain. Shares in Bed Bath & Beyond, a defunct retailer, have more than doubled in the past three months, despite their impending worthlessness. The struggling home-goods firm Tupperware saw its shares surge from 60 cents to over $4 in late July. Similarly, bankrupt trucking company Yellow also experienced a significant rise in stock prices in recent weeks.
Can meme investors be solely held accountable for these phenomena? In the case of Tupperware and Yellow, there is little to no discussion about them on Reddit forums. Short-sellers may be the true culprits in these instances, as they need to buy back shares that were sold short to close their positions.
In recent days, the bull market appears to have cooled off slightly. Minor shifts in major indices are now triggering enormous swings in meme stocks. On August 7th, Yellow saw a 25% drop in share prices, while Bed Bath & Beyond witnessed a decline of 7%. While early investors may still be enjoying substantial profits, caution must be exercised. Holding onto these stocks could potentially result in significant losses.
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