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As the first half of 2021 draws to a close, it’s clear that the mania surrounding so-called meme stocks isn’t going away anytime soon. Rather, its influence on the market is evolving -- and presenting challenges for both corporate executives and investors alike.
For leaders of companies on the receiving end of the Reddit-pump treatment, decisions must be made about whether to capitalize on the phenomenon with share offerings in the way AMC Entertainment Holdings Inc. did. And with fundamentals falling by the wayside, the dilemma on Wall Street is how to navigate an environment in which the fine line between speculation and investing has been obliterated.
"We’re in a place where it’s clear people don’t know the difference," said David Trainer, CEO of investment research firm New Constructs. "It’s upside down. The problem is that it can work in the short term based on this mob mentality. And a lot of people really don’t understand the risk."
One proxy for meme stocks as a group is an index of 37 companies whose wild volatility forced Robinhood to impose trading restrictions on them in January. The group rallied more than 10 per cent in the second quarter after surging 72 per cent in the first.
The headlines in the second quarter were dominated by a surge for theater chain AMC that reached more than 600 per cent at its strongest, as well as gains for the original meme stock, GameStop Corp. Yet the past three months also showed how the "diamond hands" loyalty of some novice retail traders doesn’t always apply. A spattering of shares surged only to then quickly crater, with individual investors often left holding the bag.
Some companies have been quick to take advantage of their rapid share-price rallies to raise funds by selling additional shares. AMC is the prime example of a company that not only embraced the retail crowd -- Chief Executive Officer Adam Aron has been a cheerleader for the stock’s cult following -- but also raised capital from the frenzy.
The once left-for-dead theater chain has raised US$1.25 billion in the second quarter alone, giving it another shot at improving its business despite issues that raised red flags for some investors even before the coronavirus shut theaters.
As for GameStop, that stock has struggled to return to its intraday record of US$483 since late January. Still, the company’s current US$16.1 billion market value shows the retail crowd is capable of dramatically transforming the fate of a company. GameStop has capitalized by raising roughly US$1.7 billion through share sales in the last few months. But it also used those funds to wipe out all of its long-term debt in hopes of an ecommerce-focused model.
For each AMC Entertainment or GameStop able to take advantage of elevated stock prices, there are a handful of companies like Clover Health Investments Corp. and Wendy’s Co. whose share prices haven’t remained lofty long enough to tap the market for additional capital.
The lack of stability of these moves also serve as red flags for veterans who have lived through the dot-com bubble and the 2008 financial crisis. It’s a scenario many corporate executives would rather avoid.
"If you’re a company and you’re trying to run a business, you don’t want your share price flying all over the place because it doesn’t build a particularly good investment case to attract new shareholders," said Michael Hewson, a market analyst at CMC Markets UK.
As the calendar flips to the third quarter, what lurks among the tall grass in the land of meme stocks is anyone’s guess.
However, the rise of retail traders is unlikely to fade despite economies reopening in the wake of the pandemic, according to a report by investment adviser Betterment LLC. The adviser found that 58 per cent of the 1,500 traders it surveyed plan to trade even more as pandemic restrictions are lifted. A Jefferies survey of about 500 individuals yielded similar results, and confirmed the bank’s view that retail trading will remain elevated.
"I don’t think this is something that’s going to go away, but the boredom threshold for some of these traders will make it more difficult to see where it will go next," Hewson said by phone.