Mitch's Mailbox

June 16th, 2021

Mitch’s Take on the “Meme Stocks” Phenomenon

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Thomas F. from Sacramento, CA asks: Hello Mitch, I’m curious to hear your thoughts about the staying power of so-called “meme stocks.” I have read your columns for some time, so I know you probably advise against chasing heat. But I’m curious if you see something else at work here? A shift toward empowered individual investors?

Mitch’s Response:

Thanks for sending a question, Thomas, and for being a long-time reader. I appreciate it.

For readers who may not be familiar with the concept of a “meme stock,” it is in reference to stocks like GameStop and AMC that have been popularized in online forums like Reddit and on social media. Viral videos, hashtags, and discussion forums have given way to wild volatility in a few of these names. The financial media cannot get enough.

You were spot-on in your question, Thomas – I do not advocate getting swept up in trading mania for a handful of individual stocks. “Chasing heat” is one of the oldest and most common mistakes an investor can make. It’s well-documented. Yet investors keep making the same mistakes anyway.

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This is not to say that there are not quite a few individual investors who have made a pretty penny in meme stocks. I’m sure there are plenty of success stories and overnight millionaires to cite. But for most investors, the risk of trading based on emotional drivers and headlines far outweighs the potential benefit of making trades at just the right time. Over time, there are more losers than winners.

The fundamentals of the two most popular meme stocks today, GameStop and AMC, are just plain bad. AMC lost -$1.42 per share in Q1 2021, which was 10% lower than most analysts expected. Net income fell by -$567 million in the quarter. GameStop’s adjusted EBITDA was ($0.7) million in Q1 2021, compared to a loss of ($75.5) million in Q1 2020. For GameStop, these are sizable losses for a company specializing in gaming, an industry that should have enjoyed brisk tailwinds during a lockdown and economic restrictions.2 Investors truly focused on fundamentals should not go anywhere near these stocks.

Some readers or meme stock enthusiasts may see this position as out of touch, which I’m perfectly fine with. As I’ve written before, I don’t need 100+% gains in a few months to help Zacks Investment Management clients reach their long-term goals. Most investors who are focused on long-term outcomes are not interested in the levels of volatility that come with investing in meme stocks, either. It’s not worth the uncertainty, and it strays way too far from the disciplined approach we employ here.

I do see some positives to the story, however, pursuant to the part of your question about “empowering individual investors.” I think it’s generally good to see more and younger investors interested in the stock market. Investing to build wealth over time is the crux of what we do and what we believe in here at Zacks. That said, Mr. Market has been teaching individual investors – particularly overly confident ones – hard lessons for centuries. The next market dislocation could deliver a hard reality check to heat chasers, which I hope reinforces the benefits of diversification and fundamental investing.

Those are two factors that I recommend for investors who are building their retirement nest egg. In addition, I recommend planning a retirement strategy that takes the “what ifs” into account. Our free guide can help you to prepare for what’s to come as you strive for long-term success.

If you have $500,000 or more to invest, get our free guide, How Solid Is Your Retirement Strategy.3 You’ll get valuable and practical ideas to help build a “weatherproof” retirement strategy that can potentially protect your retirement nest egg from any storm that could threaten your financial security.

Disclosure

1 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.

2 Seeking Alpha. June 14, 2021. https://seekingalpha.com/article/4434696-gamestop-dismal-revenue-trend-eventual-bubble-burst

3 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.

Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

Returns for each strategy and the corresponding Morningstar Universe reflect the annualized returns for the periods indicated. The Morningstar Universes used for comparative analysis are constructed by Morningstar (median performance) and data is provided to Zacks by Zephyr Style Advisor. The percentile ranking for each Zacks Strategy is based on the gross comparison for Zacks Strategies vs. the indicated universe rounded up to the nearest whole percentile. Other managers included in universe by Morningstar may exhibit style drift when compared to Zacks Investment Management portfolio. Neither Zacks Investment Management nor Zacks Investment Research has any affiliation with Morningstar. Neither Zacks Investment Management nor Zacks Investment Research had any influence of the process Morningstar used to determine this ranking.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees or other expenses. An investor cannot invest directly in this Index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Barclays Capital U.S. Aggregate Bond Index represents the price and yield performance, before fees and expenses, of the total United States investment grade bond market. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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