This stock article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA.
What is a Meme Stock?
There are Meme Stock online communities that hype and create frenzy with particular shares of stock. This is primarily done by individual investors using online tools like Reddit, Twitter (TWTR) and Meta Platforms, formerly known as Facebook (FB) to communicate. Reddit is currently a privately held company. It did however file registration papers in December, 2021 with the Securities and Exchange Commission (SEC) to go public. If they do go public, and you are considering investing, read these and other disclosure documents very carefully.
Exhibit A for a Meme Stock is GameStop Corporation (GME), a video game retailer. GameStop had a change of leadership. Ryan Cohen had sold Chewy, an online retailer of pet food and other pet related products to PetSmart (PETM) in 2017 for $3.35 Billion. Yes, with a B. Eventually he found his way to GameStop joining the Board in early 2021. They are attempting to pivot from primarily a brick-and-mortar operation to an e-commerce retailer. The Poster child of the Meme Stock movement has a 52 week range of the stock price from $17- $483.
That is not a typo.
The face of the Meme Stocks was Keith Gill; a Massachusetts based financial analyst and investor. His online names were Deep Freaking Value, DFV (clearly edited for our readers) on Reddit and Roaring Kitty on YouTube. Mr. Gill was so popular and successful at what he did he was invited to testify before the U.S. House Financial Services Committee. Not something I would enjoy but he handled himself just fine.
At the time, one of the initial beneficiaries of this movement was Robinhood (HOOD). The trading app appealed to young, individual investors. The major appeal of course was the ‘commission-free’ trading. Free. Right. Also, just by opening an account…You guessed it…You get ‘free stock.’ What’s not to like? Oh, and no investment experience is required either…
The really sad news was when a young college student killed himself in June, 2020. The young man read messages in his account and thought he owed Robinhood $730,000 due to stock losses. He was, if you can believe this, approved to buy and sell stock options, which he did.
A 20 year old college student, with no income and limited investing experience, was approved to buy and sell stock options.
Think about that.
It appears the good news is that Robinhood has removed the confetti animation that would popup when you made a trade. I’m sure this was just in response to regulatory pressure about its gamification tactics.
Interestingly enough, at one point in late January 2021, Robinhood froze purchases for individual investors for GameStop along with other popular Meme Stocks like AMC Entertainment (AMC), Blackberry (BB) and Nokia (NOK). Individual investors were only allowed to hold or sell shares. The company cited regulatory capital requirements and issues with the current market volatility. Fascinatingly enough, Hedge Funds were allowed to trade. The optics were clear. The Wall Street crowd was favored over the Main Street crowd. David would not win that day. Something seems odd here. Some can trade and some can’t? Somehow it doesn’t seem consistent with their mission to “democratize finance for all.”
Here is Charlie Munger, Berkshire Hathaway’s Vice Chairman, describing Robinhood. “I think it’s just God awful that something like that brought investments from civilized men and decent citizens. It’s deeply wrong. We don’t want to make our money selling things that are bad for people.”1)
Robinhood paid a $70 million fine for misleading investors. This was conveniently done just one month before their Initial Public Offering (IPO) in July, 2021. The IPO price was $38. It has a 52 week range of the stock price from $17-$85. A week after the IPO, CEO Vladimir Tenev sold $45.5 million of his shares. Just wondering, instead of the stock symbol being HOOD, shouldn’t it have been ROB?
What Made Meme Stocks So Popular?
Meme Stocks became very popular at the start of the pandemic. Socializing came to a screaming halt. You couldn’t go out to a bar. Heck, a lot of folks built a bar in their own home.
Unfortunately, many folks lost their job. If you were working, for many it was the Work-From-Home (WFH) model. This provided ample time to spend at home with your loved ones or make your daily trip to Home Depot (HD). Alternatively, you could go online all day while you were ‘working’ (that’s when the markets are open, right?) and buy and sell stocks, options, crypto currencies and Non-Fungible Tokens (NFT)…whatever the heck they are!
Why the Last Meme Stock?
Let me count the ways:
- The slow, but inevitable, reopening of the economy. The pandemic started with Covid-19 then the Delta Variant and now we have Omicron. Will we have another variant? Odds are, regrettably, yes we will. Over time, likely with some false starts, the economy will slowly reopen. At some point people will, um, err, how to say this…go outside. Granted, you could be outside on your phone trading options, but at least you won’t be in your home. That $2,500 Peloton (PTON) bike in your basement will be an awesome place to hang your clothes. I know I’m showing my age, but I did this years ago….with a NordicTrack (IFIT).
- The return of Professional Sports and the corresponding wagering that goes along with it. Sports’ betting is on fire. It generated $131 Billion in revenue in 2020. This is expected to grow to $180 Billion by 2028. 2) the leader here is DraftKings (DKNG). I guess if you want to bet on the market, it might as well be with a company in the gambling industry. Having said that, more wagering, less stock ‘investing.’
- More states are legalizing gambling. Currently there are 30 states and the District of Columbia that allow sports betting. I think the Arizona Lottery has the best slogan, “You Can’t Win If You Don’t Play.” It makes sense, doesn’t it?
Back in the day, Presidential Candidate Ross Perot described the effects of North American Free Trade Agreement (NAFTA). What he was addressing was all of the potential jobs going to Mexico as the “giant sucking sound.” Unfortunately here in Connecticut we knew better. Regrettably the “giant sucking sound” was actually here in Southeast Connecticut. There were a few places you could go, where their facilities are just staggering. They are called Casinos. I haven’t studied it carefully but it appears Casinos are not built by their customers winning. The State of Connecticut got a nice jump on this as they were opened in 1986. Now Connecticut has legalized sports betting. Why not, it’s more revenue for the State. More sports gambling equals less stock gambling. Excuse me, less buying and selling of Meme Stocks.
- The current Bull Market being very long in the tooth. We had the Great Recession from 2008-2009. That was, well, unbelievable. Although there have been some speed bumps along the way, it has been a heck of a run since then. Eventually though markets will regress to the mean. This means that things will even out over time. Said differently, the Bear Market is just waiting for a Black Swan event. A Black Swan event is an event that typically can’t be predicted. It can also result in severe negative consequences for the economy. That’s when it can get ugly, quickly.
- Regulation. This may take some time. It always does. Don’t misunderstand me; I’m not a big fan of regulation. With that said, I understand it has its place.