Why Investors Shouldn’t Be Fooled by the Meme Stocks Rally


  • Gamestop’s (GME) recent earnings report sent meme stocks up today.
  • Several of its peers have already started losing momentum, though.
  • This should remember investors that a quick rally doesn’t make a stock a good buy.
meme stocks - Why Investors Shouldn’t Be Fooled by the Meme Stocks Rally

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Gamestop’s (NYSE:GME) fourth-quarter earnings report has triggered a rally in meme stocks today. After the video game retailer beat Wall Street expectations on revenue and earnings-per-share (EPS), GME stock surged more than 48%. While it has come down slightly since then, the stock remains firmly in the green.

Unsurprisingly, it is the top trending stock across social media message boards, with the sentiment on r/WallStreetBets up 70%. And while Gamestop continues trending upward, other prominent meme stocks are riding its coattails. AMC Entertainment (NYSE:AMC) is up 3% for the day, while Carvana (NYSE:CVNA) has surged by 18%. Fellow 2021 sensation Koss Corporation (NASDAQ:KOSS) has jumped 8% so far, and Nokia (NYSE:NOK) remains slightly in the green by 0.11%.

The meme stock rally appears to be already running out of steam for all these gainers today. Bed Bath & Beyond (NASDAQ:BBBY) rose on early market momentum but has already slipped back into the red. This is likely indicative of other things to come for the stocks enjoying superficial gains today.

A Closer Look at the Rally in Meme Stocks

The scenario playing out across markets today as meme stocks rise is nothing new. We’ve seen it before, often when Gamestop has good news to report. Retail traders follow the meme stock leader closely, and when it rises, they see fit to double down on its popular peers. Social media sentiment soars as investors float the possibility of another short squeeze like the one that sent GME stock to unprecedented heights in early 2021, creating the meme stock movement.

This time is no different, particularly as investors clearly see the positive earnings report as an indication that Gamestop is finally turning around. Understandably, the meme stock’s cult-like fanbase will want to believe the best of their stock. But while these retail investors watch their screens and pray for another Gamestop short squeeze, some experts aren’t so convinced. Reuters reports that Russ Mould, investment director of AJ Bell, believes the rally “looks to be the result of good cost control rather than top-line growth, which is not ideal.”

If that is indeed the case, it certainly isn’t ideal for these companies to sustain actual growth. The fact that plenty of meme stocks have already slipped back into the red or have fallen from where they were earlier supports this hypothesis. AMC began the day at $4.72 per share but has slipped back to $4.57. Meanwhile, the AMC Entertainment Preferred Equity Units (NYSE:APE) have been trending downward all day. BBBY stock has been in a race to the bottom since this morning and is currently down more than 1%. All signs point to the fact that this meme stock rally is destined to be as short-lived as many that came before it.

The Bottom Line

On days like this, investors should remember that social media hype doesn’t make a stock a good buy. BBBY quickly rose this morning, but it couldn’t even sustain the momentum for a few hours. This can be attributed to the fact that almost every company-specific headline regarding Bed Bath & Beyond lately has been negative. One example is the fact that it just missed a key fundraising deadline. The same can be said for AMC. InvestorPlace contributor Chris MacDonald notes that the company has issued so many shares that it has undermined itself by issuing too many shares.

Additionally, no one should ignore the fact that both Gamestop and AMC suffer from outdated business models. That unfortunate fact has earned them places on multiple lists of meme stocks to sell. Gamestop has reported an excellent quarter, but that doesn’t mean it will ever be a smart investment, and it certainly doesn’t mean that less stable meme stocks will be.

On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2023/03/why-investors-shouldnt-be-fooled-by-the-meme-stocks-rally/.

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