What the Meme Stocks’ Flame Out Tells Us About the Market

What the Meme Stocks’ Flame Out Tells Us About the Market

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The “Reddit Revolution” came back in full force recently, with Reddit traders chasing after meme stocks Bed Bath & Beyond Inc. (NASDAQ:BBBY) and AMC Entertainment Holdings, Inc. (NYSE:AMC).

As you may remember, this whole meme-stock mess started when a group of Reddit users piled on to buy low-quality GameStop (NYSE:GME) stock during the last trading week of January 2020. Their efforts ultimately created dramatic short-covering rallies that shot GameStop shares sky high.

The stock’s fundamentals, however, didn’t match its popularity. The company eventually released poor earnings reports over the coming quarters, and the stock came crashing back down, leaving overzealous investors out of luck.

The same phenomenon happened again with the same two companies over the past few months.

At the end of July, shares of BBBY were trading at around $5.  Then, traders on Reddit began messaging each other on the WallStreetBets thread in early August about why it made sense to buy the stock. (Note: There had been no recent positive news on the company.) Investors jumped into BBBY, and by mid-August, shares were nearly 6X higher and approaching $30.

The catalyst behind interest in Bed Bath & Beyond – besides the Reddit-induced meme-stock mania – is due in part to one investor in particular: Ryan Cohen.

Cohen, the current chairman of GameStop and a major player in its rise, has been at the forefront of the meme-stock movement. In March, he revealed that he purchased a 9.8% stake in Bed Bath & Beyond. On August 15, a Securities and Exchange Commission filing revealed that, in April, Cohen had placed bets that BBBY shares would increase throughout the year. However, another filing revealed on August 18 showed that Cohen had sold all of his shares of the company.

Well, the mania-fever broke, and a huge selloff followed. By Friday, August 19, the stock had its biggest intraday percentage decline ever, falling roughly 41%. Last week, BBBY had fallen to around $10 per share, a 66% decrease from this year’s high. While Cohen made $59 million in profit, many investors who bought the stock during the Reddit resurgence were left holding the bag.

Now, BBBY shares did rally early this week following news that the company would be holding a conference call to discuss a “strategic update” on Wednesday, August 31. However, the update proved to be a dud. Company management announced that it was going to shut down 150 “lower-producing” stores and cut 20% of its workforce. It also revealed that it received north of $500 million in new financing from Sixth Street Partners and JPMorgan Chase & Co. (NYSE:JPM) and would issue new shares, which dilutes the value of current shares.

Bed Bath & Beyond also provided a financial update on its second quarter in fiscal year 2022. Currently, net sales are expected to come in at $1.45 billion and comparable sales are anticipated to slip 26% year-over-year. For full-year 2022, comparable sales are estimated to fall about 20%.

The stock opened 27% lower on Wednesday and ended the day down more than 21%.

AMC Entertainment’s “APE” Units Fail to Ignite AMC Stock

AMC Entertainment company management also devised a plan to try to reward its investors, though so far unsuccessfully.

In early August the company created “APE” units, named for investors who originally turned the company into a meme stock and called themselves “apes.” It is a preferred stock that will pay investors a set schedule of dividends. The special dividend is meant to appease the “apes” that have rallied around the company over the past year.

The new shares were distributed free of charge on Friday, August 19, and traded for the first time on Monday, August 22, under the “APE” symbol. On the same day, CEO Adam Aron tweeted a reminder to investors that the total value of their AMC holdings would be a combination of the regular shares plus the new APE units. Each APE unit can be changed to a common share of AMC in the future, which makes this move similar to a 2-for-1 split.

The unusual move triggered volatile trading. Shares of AMC declined almost

The bottom line: The volatility in BBBY shares and AMC shares shows that poor-quality meme stocks that social media investors use to try to game the system end up leaving rubble in hands that once held diamonds. It’s no surprise. Fundamentals are not the driving force for meme stock investors. And it’s for this reason that I have never recommended buying any of the meme stocks.

What I do recommend purchasing is fundamentally superior stocks. The reality is there’s been a massive flight to quality as meme stocks and other inferior stocks have “flamed out” while quality stocks have become market leaders. This is why my Growth Investor stocks just posted their biggest monthly gain since April 2020 and beat the S&P 500 by almost three-to-one.

As the market grows narrower, money will chase fewer stocks. In that kind of environment, institutional and individual investors alike revert their attention to stocks that are backed by superior fundamentals. My Growth Investor stocks are characterized by 62.3% average annual sales growth and 455.7% average annual earnings growth, so I look for them to continue attracting the lion’s share of investors’ attention.

To make sure you’re in the right stocks, sign up for Growth Investor today. Once you do, you’ll have full access to my latest recommendations – including the most recent additions to my Growth Investor Buy Lists.


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Louis Navellier
Editor, Market 360

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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

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Article printed from InvestorPlace Media, https://investorplace.com/market360/2022/09/meme-stock-flame-out/.

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