Meme-Stock Mania, Day 2: How Will It All End?

If you thought Monday’s eye-popping rally was just a one-day flash in the pan, you’ll be sorely disappointed. The surge in meme stocks continues on Tuesday. In fact, some of them are actually picking up speed.

Yesterday, GameStop (NYSE:) stock shot up 74.4% to $30.45; AMC Entertainment (NYSE:NYSE:) stock soared 78.35% to $5.19; and shares of headphone manufacturer Koss Corporation (NASDAQ:) jumped 38.29% to $4.37. Surely, it’s not mere happenstance that these were all meme-stock stars in 2021.

If you’re a short-term trader just looking to flip these stocks for a quick profit, I say, “Have at it.” On the other hand, if you’re a serious investor who looks at the whole company and not just its stock, there’s a lot to consider, and you may find some compelling reasons to stay out of the fray.

Fundamentals, schmundamentals

The fundamentals of GameStop, AMC Entertainment and the others didn’t have much relevance on Monday as there weren’t any company-specific catalysts to push their share prices higher. Earnings season is mostly finished (although GameStop is still expected to report on June 5), and April’s Consumer Price Index (CPI) print won’t be released until Wednesday.

If the companies’ financials had been relevant, then the short-squeeze traders ought to have picked more promising companies to focus on. For example, GameStop’s fourth-quarter net revenue decreased to $1.794 billion, versus $2.226 billion in the year-earlier quarter. Furthermore, the retailer’s cash and cash equivalents declined from $1.139 billion as of Jan. 28, 2023, to $921.7 million as of Feb. 3, 2024.

As for AMC Entertainment’s fundamentals, the movie-theater chain owed roughly $4.5 billion in long-term debt as of Dec. 31, 2023. Moreover, AMC Entertainment’s revenue declined slightly from $954.4 million in Q1 2023 to $951.4 million in Q1 2024. Additionally, the company recently disclosed its sale of 72.5 million AMC shares to raise “new equity capital,” thereby raising the issue of share-price dilution.

However, fundamentals weren’t top of mind during the speculative fervor of 2021, when Reddit users and other traders short-squeezed these same so-called “stonks” to dizzying heights. Of course, the financial-market landscape was quite different in 2021, when inflation and interest rates were comparatively low. Let’s see what prompted this week’s retail-trading renaissance.

ValueWalk contributor Dave Kovaleski did an excellent job of summing up Monday’s madness, in which Redditor and meme-stock guru Keith Gill resurfaced on social-media platform X after a multi-year absence:

Evidently, this text-less posting was enough to spur chatter about whether Gill, known as “Roaring Kitty” on X, would return in full form to spearhead another meme-stock rally. However, since the market is always forward-looking and everybody wants to leapfrog ahead of everyone else, short-term traders just went ahead and bid up the aforementioned meme-stock prices — with or without Gill’s assistance.

As of 11 a.m. Eastern on Tuesday, GameStop stock had soared 60% from the prior day’s closing price, while AMC Entertainment stock had skyrocketed 80%. Meanwhile, Koss stock had rallied 33%.

An unexpected group of winners

Generally speaking, it was the revenge of the small caps on Tuesday morning. The (DJIA) and (SPX) were nearly flat for the day, but the (RUT) was up by a full percentage point. GameStop and AMC Entertainment don’t really qualify as small caps, but the overall sentiment favored companies perceived as downtrodden underdogs.

Besides small caps, the other winners on Monday and Tuesday were, of all things, solar stocks. Just to provide a couple of examples, SunPower (NASDAQ:) stock popped 64% on Tuesday morning while Maxeon Solar Technologies Ltd (NASDAQ:) was 52% above its closing price on the previous day.

There’s no point in trying to figure out why Reddit users and other short-term traders may have targeted solar stocks for short squeezes. Unless you’re in the inner circle among these meme-stock big shots, I don’t recommend trying to guess the “next” GameStop stock.

In other words, there will be newly minted meme-stock millionaires, but you probably won’t be one of them. Just look at how the story ended the last time around, with the most popular meme stocks losing significant value in 2022, 2023 and early 2024.

I can’t imagine this go-around having a more favorable resolution than the previous ones. At the end of the day, prudent investors would be better off sticking to time-tested principles and focusing on fundamentally solid businesses. Otherwise, you may end up on the losing end of an exhilarating but largely irrational pop-and-drop cycle.